How do financial institutions calculate compound interest quarterly on fixed deposits?
As per the Reserve Bank of India, fixed deposits grew by 6.7% during the
FY 2017-18. FDs make up 32.9% of all deposits of financial institutions.
Fixed deposits are the most sought-after investments schemes for
Indians. These are even more common than life insurance and mutual fund
schemes. Individuals can open fixed deposit accounts through a majority of
financial institutions. The availability of financial mobile apps has also made
it easier to invest in FD with just a few clicks.
Attractive fixed deposit interest rates in 2019 are aimed at increasing
the number of individuals investing in such schemes. Additionally, FD
investments generate interest on interest via compounding in case of
investments of more than one year – they can earn interest on the interest and
grow their savings even more.
How financial
institutions calculate compound interest on FD?
Companies use the following formula to calculate compound interest on
fixed deposits:
A = P (1 + r/n) ^ 4t
Here,
● A is the maturity amount.
● P is the amount deposited.
● r is the fixed deposit interest rate in 2019.
● n is the number of times the interest is compounded (12 for monthly, 4
for quarterly, 2 for half-yearly, and 12 for monthly.)
● t is the duration of the FD in years.
For example, a fixed deposit of Rs. 10,000 at a rate of interest of 8%
for 5 years will provide the following returns –
A = 10,000 (1 + 0.08/1) ^ 4 x 5
A = 14,693
The amount received after maturity is Rs. 14,693 if the interest is
compounded annually. The formula for the same FD if the interest is compounded
quarterly will be –
A = 10,000 (1 + 0.08/4) ^ 4 x 5
A = 14,859
Calculating the interest earned on an FD with this formula may be
time-consuming and inaccurate. Hence, using an FD return calculator is more beneficial.
How to use an FD
calculator?
Using an FD calculator is simple, and you can do so by providing the
amount, rate of interest, tenor, and compounding frequency. This online tool
will show you the results as soon as you enter the required data.
Which fixed
deposits provide quarterly returns?
Non-cumulative fixed deposits provide
interest pay-outs on a monthly, quarterly, half-yearly, or yearly basis. Such
FDs are particularly beneficial for those seeking regular income; for example,
retired individuals. Some individuals also use the returns from a
non-cumulative fixed deposit to invest in a recurring deposit (RD).
On the other hand, cumulative fixed deposits provide returns after
maturity. Generally, the cumulative fixed deposit interest rate in 2019 is
higher than that of non-cumulative. Cumulative FDs are a smart way to spend
your bonus money.
Why are fixed
deposits beneficial than other investments schemes?
The following is a comparison between FDs and the other types of
instruments you can opt for –
1.
FD vs RD
With a recurring deposit, you have to invest a particular instalment
regularly, unlike in an FD where you invest a lump sum amount. Failure to pay
this amount will attract a penalty fee. Additionally, your RD may be rendered
inactive if you fail to deposit for several months.
Hence, fixed deposits are comparatively better as you don’t have to make
regular deposits. For this reason, FDs are also known as “park it and leave it”
instruments.
2.
FD vs PPF
Public Provident Fund (PPF) is an investment scheme provided by the
government through various financial institutions. It is a long-term instrument
with a maturity period of 15 years. You can only withdraw from a PPF account
only after the completion of 6 years. Further, the amount is restricted to 50%
of the corpus at the end of the preceding year or the 4th year,
whichever is lower.
On the other hand, you can withdraw from an FD at any time by paying a
nominal penalty fee.
3.
FD vs NSC
National Savings Certificate (NSC) is another investment option by the
government provided through post offices. The maximum investment period of NSC
is 5 years. Premature withdrawal is only possible in extreme cases such as
demise of the accountholder.
FDs provide premature withdrawal at any time. Moreover, the fixed deposit interest rate
in 2019 is higher than NSC. For
example, NBFCs like Bajaj Finance provide Fixed Deposits with the rate of
interests of up to 8.35%.
FDs are comparatively better than other investment plans. There are
several pros and cons of investing in a fixed deposit. Make sure you know them
all before you start investing.
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