Overview
A fixed deposit is a risk-free and simple investment that only needs a single deposit, an amount of money, known as principal that can be deposited with a bank for a set period of time. During this time, the deposit will gain interest. You’ll get your deposit back, plus interest, at the end of it. An FD can be opened with as little as Rs.1,000 by someone with a bank account. A seven-day minimum duration is required.
Simple Interest and Compound Interest are the two approaches for calculating interest on a fixed deposit. Depending on the deposit’s tenure and size, banks can use both. What exactly is the distinction between the two and how to derive them using the fd calculator formula? Simple interest only earns interest on the principal amount. Compound interest means that interest is paid on both the principal and the interest.
Simple Interest
- This is an easy function. It’s determined by multiplying the principal, interest rate, and time period together.
- Simple Interest is calculated using the formula:
(P x Rx T/100)
Where, R = Annual Interest Rate; P = Principal Amount; T is the number of intervals
- As an illustration – Now, if you invest Rs.10,000 for 5 years at 8% p.a., you can measure the interest as follows.
- Rs. 10,000 multiplied by 8 multiplied by 5 equals Rs. 4,00,000.
- Divide the number by 100. You will get Rs.4,000.
- So, for a period of five years, you can receive Rs.4,000 in interest. As a result, if you invest Rs.10,000 in a fixed deposit with an annual interest rate of 8%, you can receive Rs.14,000 at the end of five years.
Compound Interest
- You gain interest on the principal as well as interest on the interest in this method. Compound interest is offered by several banks on fixed deposits, but you should make sure you get a good deal.
- For instance – Suppose a bank offers 8% p.a. on a 5-year deposit with interest compounded annually. So, if you spend Rs.10,000, the interest can be calculated as follows:
- Year One
For the first year, we use the simple interest approach.
Rs.800 = 10,000 x 8 x 1 / 100
As a result, the first year’s interest gained is Rs.800. This amount is returned to the principal. As a result, the second-year principal is Rs.10,800.
- Year Two
On Rs.10,800, you can now gain 8% in the second year.
Rs.864 = 10,800 x 8 x 1 / 100
You will get Rs.864 in interest. This is applied to the principal once more. As a result, your deposit now stands at Rs.11,644.
We can measure the compound interest for the next three years in this manner. Some banks, on the other hand, compound interest on a monthly, quarterly, or half-yearly basis. Instead of doing it this way, we can use a simple formula that multiplies the principal by the interest rate multiplied by the number of periods in years.
P(1 + i/100)n – 1 = Compound Interest (CI).
Where, P is the principal amount; n is the number of years; and I is the annual interest rate.
As a result, in the preceding case, you receive
(1+8/100)5 – 1 = Rs 4,693 = 10,000
Rs 14,693 is the total amount.
Now we can see how much more money we can make thanks to compound interest. Calculating interest does not have to be difficult, and Finserv MARKETS make it convenient and hassle-free with the aid of a fixed deposit calculator online.
Wrapping Up
Keep in mind that the interest rate on a fixed deposit is not the same for all tenures. It’s not true that choosing the longest term available guarantees you’ll get the best interest rate. Check the fd maturity calculator, which is normally available on the bank’s website, and select the tenure that gives you the highest compound interest rate.
A fixed deposit is a very secure and profitable investment. If you invest wisely, you will enjoy the benefits of having your money work for you. Compound interest, monthly compensation options, and high-interest rates are all advantages of investing in our FDs! Learn more about what a fixed deposit is in India by visiting Finserv MARKETS.
