Earning family members in India consider it a responsibility to save for not just their future, but others as well. People save up for important events, celebrations, and emergencies. While many earning-class individuals are risk-averse, they constantly search for safe ways to invest.
Fixed Deposits (FDs) are a popular investment option in India, known for their safety and reliability. With FDs, investors deposit a certain amount of money with a bank or financial institution for a fixed period and earn a predetermined interest rate on their investment. However, to maximise the returns on their FD investment, investors need to understand the concept of compound interest.
Compound interest refers to the return earned not only on the initial principal but also on the accumulated interest earned over time. By reinvesting the interest earned, individuals can gain a higher return. This is where an FD compound interest calculator comes in handy.
Understanding Compound Interest: An Illustration
To understand compound interest, let us take an example. Suppose you invest Rs. 1,00,000 in an FD for 5 years, with an annual interest rate of 7.5%. With simple interest, you would earn Rs. 37,500 as interest over the 5-year period (7.5% of Rs. 1,00,000 per year). However, with compound interest, the interest earned in the first year gets added to the principal amount. The return calculated takes on the new amount in the second year, and so on.
So, at the end of the first year, you would earn Rs. 7,500 as interest (7.5% of Rs. 1,00,000). At the beginning of the second year, the new principal amount would be Rs. 1,07,500 (Rs. 1,00,000 + Rs. 7,500). Now, the interest for the second year would be Rs. 1,07,500, which comes out to be Rs. 8,062.50. Similarly, at the end of the third year, the interest earned would be Rs. 8,796.09, and so on.
As you can see, with compound interest, the interest earned is more substantial than simple interest. The times an amount gets compounded also plays a crucial role in determining the interest earned. If interest is compounded annually, the interest earned will be lower than quarterly or monthly.
Benefits of Using an FD Compound Interest Calculator
With a compound interest calculator, investors can estimate the interest earned on their FD investments with ease, without having to manually chart out the interest for each year. For your information, we have compiled a list of five benefits that FD investments bring.
- Accuracy: This algorithm provides accurate results in just a few seconds. This eliminates the possibility of manual errors that could lead to incorrect figures.
- Time-saving: Estimating compound interest on FDs manually can be time-consuming and tedious. An FD compound interest calculator saves time and effort by providing instant results.
- Comparison: With such a nifty tool, you can compare the interest earned on different FD investments with varying interest rates and tenures. This helps you make an informed decision on which FD investment would be the best for you.
- Planning: Financial planning is now a breeze by getting a clear picture of the interest earned at the end of the tenure. This helps in making better investment decisions, especially when it comes to long-term financial planning.
- Flexibility: The calculator allows you to experiment with different investment amounts, interest rates, and tenures. This helps you determine the best combination for maximum returns on your FD investment.
Choosing an FD Compound Interest Calculator
When it comes to using an FD compound interest calculator, there are a variety of options available online. Here are some factors to consider when choosing a calculator:
- Reliability: Choose a tool from a reputable source to ensure accurate results.
- User-friendliness: The application should be easy to use, with clear instructions and minimal technical jargon.
- Flexibility: Look for a bank app that allows you to input a range of values, including different investment amounts, interest rates, and tenures.
- Additional features provided: Some calculators may offer features like graphs or charts, to help visualise your potential returns.
Steps to Use a Compound Interest Calculator
- Input the investment amount: Enter the amount you plan to invest in the FD.
- Enter the interest rate: Input the interest rate offered by the bank on the FD.
- Set the tenure: Choose the length of time you plan to keep your money invested in the FD.
- Choose the compounding frequency: Select the frequency of compounding, which can be monthly, quarterly, half-yearly, or yearly.
- Click “Calculate”: Once you’ve entered all the necessary information, click the “Calculate” button to see your estimated returns.
Interpreting the Results
- Total interest earned: This is the total amount of interest you will earn over the tenure of the FD.
- Maturity amount: This is the total amount you will receive at the end of the tenure, including your original investment and the interest earned.
- Yearly interest earned: This is the amount of interest you will earn each year on your investment.
- Compounding frequency: The frequency of compounding you selected will also be displayed, indicating how often your interest will be added to your investment.
Tips for Maximising Returns
- Choose a higher interest rate: Look for banks offering higher interest rates to earn more on your investment.
- Opt for longer tenures: Longer tenures usually offer higher interest rates, which can help maximise your returns.
- Consider compounding frequency: Choosing a higher compounding frequency can help increase your returns.
- Choose a reliable bank: Look for a bank with a good reputation for FDs to ensure your investment is safe and secure.
- Consider reinvesting: At the end of your FD tenure, consider reinvesting your returns to earn even more interest.
Once comfortably informed about Fixed Deposit, their compound interest, and how they are a few of the most stable sources of earning passive income in India, feel free to reach out to a bank of your choice and apply. The process is simple and can be processed with even a bank’s mobile application!