Fixed Deposits have been the most popular choice of investment among Indians over the past few years. This is mainly because of their high reward and low-risk characteristics. It is a kind of term deposit that helps you earn much higher interest than regular savings accounts. FDs have fixed interest rates that stay consistent throughout the tenure until the maturity period closes.
To reap the maximum benefits of a Fixed Deposit, you have to understand just how it works and how the interest rates are calculated, but before we get to that. You will need to know all there is to know about Fixed Deposits.
What is a Fixed Deposit?
An FD is considered to be a fixed-income savings account, where you can deposit money for a stipulated period of time with a pre-determined interest rate in place. You can either withdraw the interest earned as a regular source of income for yourself, or you can reinvest the amount for better returns. The most sought after advantage of an FD is that it offers guaranteed returns, unlike high-risk investments in the stock market.
How does FD work?
When you invest in a Fixed Deposit, it is essential to understand that your funds should not be withdrawn until the maturity period is completed. This tenure can vary anywhere from a week to ten years and when you choose to invest in an FD, you are allowed to pick from a number of term options. Each tenure comes with a predetermined interest rate. For example, for about 6 months, the interest might be 3.10% and for a year it goes up to 3.15%.
So, if you opt for a six-month term, you’ll enjoy an interest rate of 3.10% at the end of the term.
If you invest a larger sum of money, the interest rates will increase in all likelihood. When your deposit has matured, you are allowed to withdraw the money and either shift it to another Fixed Deposit or use it for what you need.
Fixed Deposit calculator
A Fixed Deposit calculator is an online tool that investors can use to calculate their returns, mainly regarding maturity benefits. You can input your basic details, such as your deposited amount, time period, and the interest, to calculate your returns once the deposit has matured.
Interest rates usually change from bank to bank, which is the same for the length of the maturity period. Usually, a longer maturity period will yield more returns. The interest is compounded every three months in a number of banks, which is more beneficial when compared to quarterly, half-yearly, and annual returns.
How is the FD calculated?
Generally, the maturity value and interest earned from Fixed Deposits is calculated with a simple formula.
A = P x (1 + r/n)nt
I = A – P
A= maturity value
P= Principal amount
r= rate of interest
n= frequency of compounded interest
I= Amount of interest to be earned
If you have deposited an amount of Rs.20,000 in a bank for three years at a compounded quarterly annual interest rate of 5% then,
Principal amount = Rs.20,000
Rate of interest = 5%= 0.05
Tenure= 3 years
Compounded interest= quarterly
A = P x (1 + r/n)nt
= 20000 x (1+0.05/4)
= 20000x (1+0.0125)
= 20000x 1.160754517
Maturity Value (A) = Rs.23,215
I = A-P
= 23,215- 20000
Interest earned (I) = Rs.3215
How useful are online calculators?
Most online FD calculators are easy to use and highly accurate, with results being generated in a matter of seconds. It completely eliminates the need for manual calculation. This calculator is also more accurate than computer spreadsheets and is extremely convenient.
To calculate the interest rates, you will have to input the following details
Deposit amount: The amount you have invested in a particular scheme
Tenure: The period for which the amount has been deposited
Interest rate: The rate of return offered on your chosen deposit scheme
Once you’ve typed in these details, all you have to do is click on the ‘calculate’ option and the maturity amount will be calculated instantly and with absolute precision.
Benefits of a Fixed Deposit calculator
An online FD calculator is a simple tool that will help you save time, money, and effort, and now that you know how it works, here are a few benefits of this financial tool.
When you manually calculate your FD interest rates, you run the risk of making a number of errors. This type of calculation requires thought and accuracy to generate the correct results, for if you fail to put in the right numbers it might result in a huge error. Today, several banks offer online FD calculators, which will accurately give you the maturity period and interest earned.
Effortless and convenient
Normally, calculating your FD interest with a pen and paper or even with a normal calculator might take a long time. You could spend hours trying to check if your calculations are right, which can be stressful. With this specialized online calculator, you can formulate the FD maturity level and interest earned in seconds. You can also check interest rates in a number of banks and pick the one that suits your financial situation.
It is always wise to plan ahead and base your investment decisions on a scheme that is more rewarding. An FD calculator can help you make the right decision by providing quick and accurate answers, following which you can decide on which FD scheme suits your situation better.
Man presenting financial calculation concept