For ages now, Fixed Deposits (FD) have been considered to be a safe and risk-free way of investing money. Most investors who have a low-risk appetite prefer parking their reserve cache of funds in this traditional pool. A fixed deposit surely offers a higher rate of return as compared to a savings account. However, before making a medium or long-term investment, it is vital that you understand the calculation process of fixed deposits.
To understand the calculation process of an FD, let us first understand how it works. As the name suggests, the deposit is fixed, which means the investment is blocked. This, however, does not mean you cannot withdraw the money before the tenure. You always can, though you’ll have to pay some charges for the same. When you invest in an FD, you lend money to an NBFC or a bank for a specified time period. The institution, in turn, promises a guaranteed rate of interest over the amount you deposit.
The interest that you receive on the FD depends on the tenure you choose for the investment. Most banks offer a tenure that can be from 7 days to 10 years. The annual interest rate of a 7-day fixed deposit will be lower than a 5 or 10-year deposit.
The calculation of interest on your fixed deposit involves the amount invested, the duration or tenure of the investment and the rate of interest that is offered. There is a formula to calculate the interest:
Interest on Fixed Deposit = Amount Invested x Rate of Interest x (Tenure/ 12 months)
It should be noted here that a Cumulative Fixed Deposit pays the interest and the principal together at the time of maturity as a lump sum. In the case of a Non-Cumulative Fixed Deposit, the interest is paid out to you at regular intervals. As per your requirements, you can choose the interest payout to be annual, half-yearly, quarterly or monthly.
In case you wish to calculate the interest or maturity amount of a deposit that you wish to make, you can simply use a Fixed Deposit Calculator. The free online tool will help you in deciding the amount and the tenure for which you need to invest.
The Bottom Line
For most Indians, investments are synonymous with fixed deposits. With a flexible duration and guaranteed returns, accumulating a corpus becomes more manageable. If you are someone with a low-risk taking capacity and need to make a short term investment, an FD may be a good idea. The returns are good, and volatility is minimal.