The reason why people choose to invest in the fixed deposit is the assurity of stipulated returns at regular intervals. There is certainty of receiving the investments amount and the accrued interest at the maturity of the plan. Thus, the risk factors associated with these term investments are less. Also, there is no hard and fast rule of making long term investment.
The investment period can be as short as 7 days or lengthy up to a decade. The depositor has the liberty to select the tenure of investment as per his/her financial goals. Moreover, the investment amount and the interest payout frequency is also determined by the candidate opening a Fixed deposit account. The interest can be received monthly, quarterly or annually. The depositor can even opt for cumulative interest.
Cumulative and Non-Cumulative Fixed Deposit:
Cumulative Fixed Deposit- In this type of deposit, the interest is not payable at the monthly, quarterly, half-yearly or annual rests. Rather it is compounded and rolled out at the time of maturity of the plan along with the original investment amount. The people who do not require regular cash flow can go for this plan.
Non-Cumulative Fixed Deposit- In the non-cumulative form of deposits, the interest is paid out at the monthly, quarterly, half-yearly and annual intervals. This plan is most suitable for people who want to gain regular income.
Types of Interest Calculations:
The Interest of Fixed Deposit is calculated using two different methods – the simple interest method and the compound interest method.
Simple Interest – It is the interest that is calculated as a percentage of the initial investment, for the whole duration. This is the straight forward and the fastest method to calculate the interest on the amount deposited. The interest amount calculated using simple interest remains the same throughout the tenure of deposit.
How to Calculate FD Interest at Simple Interest:
The simple interest can be calculated using the simple interest calculator that reveals the maturity value of the plan and the interest yield. The formula used is as follows:
Simple Interest Formula:
A = P (1 + rt)
A = Total Accrued Amount (principal + interest)
P = Principal Amount
I = Interest Amount
r = Rate of Interest per year in decimal; r = R/100
R = Rate of Interest per year as a percent; R = r x 100
t = Time Period involved in months or years
Compound Interest – It is the interest which is computed as a percentage of the renewed principal, i.e. original principal along with the accumulated interest of prior periods. Under this method, the interest earned in the previous intervals is added to the initially invested amount. Hence the amount on which the interest for the next period will be calculated rises.
How to Calculate FD Interest at Compound Interest:
To calculate the compound interest use the compound interest FD calculator that will help to compute the realistic maturity value and the amount of interest earned. The compound interest formula is:
Compound Interest Formula:
A = P (1 + r/n) nt
A = the maturity value of the investment including interest
P = the principal investment amount (the initial deposit amount)
r = the annual interest rate
n = the number of times that interest is compounded per year
t = the number of years the money is invested for
Though the interest calculation method is decided by the bank but the account holder can anticipate the returns by calculating the maturity value using FD calculator. It is simple to use and provides the true insight of the future gain. The user just has to enter the amount, tenure and rate of interest in the relevant fields. Once the information is fed in the calculator the required result is displayed. To clarify how to calculate fixed deposit maturity value let’s take an example:
For Example – The expiration value of term investment of ₹ 10,000 made for the period of 5 years at the quarterly compounding interest rate of 6.00% p.a. will be ₹ 13,469. The total accrued interest will be ₹ 3,469. The per year interest will be:
Year 1 – ₹ 614
Year 2 – ₹ 651
Year 3 – ₹ 691
Year 4 – ₹ 734
Year 5 – ₹ 779
So this is how the interest is calculated using the fixed deposit calculator. The same procedure is followed in the simple interest calculator. Just enter the values and know the yield.