There are several banks and financial institutions which offer fixed deposit (FD) facilities. It can be difficult to pick a financial institution where you can keep your deposit. You can calculate the interest on FD separately for all the available financial institutions to understand which one will give you maximum returns.
Why is Fixed Deposit a Safer Option of Investment?
A fixed deposit is one of the safest instruments to build a corpus for the future. Since it is not an investment in the volatile stock or bond market, your rate of interest stays fixed. After the maturity period, you get a guaranteed interest amount from your financial institution.
However, before you put your hard-earned money in a fixed deposit and lock-in the fund, you should know how you can fetch a higher interest on it.
How to Maximise Your Earnings on Fixed Deposits
Here are some ways that will help you earn a high interest amount on your fixed deposit, and thereby maximise your total savings:
- Keep the Fund for a Long Period
When you keep your deposit for a more extended period, the interest rate remains applicable for a longer duration. This will help you gain more pay-out from the financial institution after the maturity period ends.
- Look for a Higher Interest Rate
If you want to earn a higher earning on your fixed deposit and grow your wealth, you should look for a financial institution that offers higher interest. For this, you need to compare the rate of interest on FD provided by different banks and NBFCs.
- Go With High Compounding Frequency
The shorter your FD’s compounding cycle is, the more interest you can earn. This is why, besides the interest rate, you also need to check this compound frequency carefully.
Nevertheless, before you keep your fund as a fixed deposit, you should ideally calculate and check what the total withdrawable amount will be after the maturity period. It can help make your future financial goals accordingly.
Procedures to Calculate Interest on FD
The interest rate on FD differs from one financial institution to another. This is why you need to calculate the interest on FD before opening the deposit account.
You can find FD facilities providing both simple and compound interests. Following are the calculation processes for both:
- FD Interest Calculation on Simple Interest
A simple interest FD return does not have the compounding effect. Your interest is calculated for one cycle only. Following is the formula for calculating the FD interest on simple interest:
Interest = (Premium You Deposit x Rate of Interest x Total Maturity Period) / 100
For example, if you open a fixed deposit account of Rs. 20 Lakhs for a maturity period of 10 years, and the interest rate is 8%, your interest income will be Rs. {(20 x 8 x 10) / 100} Lakhs = Rs. 16 Lakhs. Therefore, your financial institution will give you a total of Rs. (20 + 16) Lakhs = Rs. 36 Lakhs as a pay-out.
- FD Interest Calculation on Compound Interest
A fixed deposit facility that comes with compound interest lets you grow your fund faster. This is primarily because, after every compounding cycle, the financial institution will add the accrued interest to the principal amount. As a result, the principal amount keeps on increasing after every cycle, thereby generating more interest.
Following is the formula to calculate FD earnings on compound interest:
Interest = [P x {(1 + r / n) ^ nt}] – P
Here, P = Principal, r = Rate of Interest, n = compounding frequency (monthly, quarterly or semi-annually), t = maturity period
Let’s assume that you open a fixed deposit account of Rs. 20 Lakhs for a maturity period of 10 years, and the interest rate is 8% per annum. If the compounding frequency is semi-annual, your total accrued interest will be:
Interest = Rs. [20 x {(1 + 8/2) ^ 10 x 2}] – 20 Lakhs = Rs. 23.82 Lakhs
Therefore, you will get a total of Rs. (20 + 23.82) Lakhs = Rs. 43.82 Lakhs as a pay-out from your financial institution.
However, it can be difficult and time taking to calculate the earnings of FD, especially if the interest is compound. You can leverage an FD calculator to ease the calculation process. It is an online tool that you can access from the website of financial institutions or its commercial partners.
How to Use an FD Calculator
Following are the steps that you will have to follow to leverage the online calculator:
Step 1: Access the online FD calculator
Step 2: Enter the amount you want to save in your fixed-deposit
Step 3: Choose the preferred tenure up to which you will keep your fund with the financial institution
Step 4: Enter the interest rate
After you complete these simple steps, the fixed deposit calculator will display the maturity amount and the total accrued interest.
Features and Benefits of Using FD Calculator
Following are some major benefits that you will enjoy by using this online calculator:
- Ease in Calculation
Calculating the interest on pen and paper using formulae is a troublesome and time-consuming affair. Moreover, you can make costly mistakes. By using the FD calculator, you can easily understand the maturity value of your fixed deposit by entering the necessary inputs. Since it is a computerised online tool, you can get the results quickly and accurately.
- Comparison Tool
The FD calculator also lets you compare and analyse the probable earnings against different deposit amounts and interest rates. For this, you only need to change the input values accordingly. You can also understand how much you will need to deposit to get a certain amount after maturity.
- Unlimited Free Access
The online calculator comes with no usage charges, and you can use it as many times as you want. As a result, you can calculate the interest on FD and draw multiple inferences by reconsidering your fund amount, maturity period, etc., multiple times.
Fixed deposits let you enjoy a risk-free guaranteed income, and thereby grow your money. You can invest your funds in an FD and stay assured that on a certain date, the financial institution will be liable to give you a pre-determined amount. Before you keep your money in a fixed deposit, you should ideally calculate what the total amount will be after the tenure ends.
