FD calculator determines the maturity value of your fixed deposit amount. A fixed deposit gives you an almost risk-free, insured, and guaranteed return on your deposited amount. It is a safe investment option better than a regular savings account for conservative investors. You can use the Fixed Deposit (FD) calculator to find out or compare different rates for maturity amount, earned interest, and payouts.
To reap the full benefit of a fixed deposit, you have to understand how it works and how the fixed deposit rates are calculated in this fixed deposit calculator. This article will provide everything you need to know to make an informed decision before committing to an investment.
What is fixed deposit?
A fixed deposit (FD) is a type of investment account in which you invest a specific amount of money at a fixed interest rate and term. Based on your instructions, at the end of the agreed period (term), the investment can either be rolled over (reinvested) or liquidated (returned to you) with the interest amount earned.
The financial institution or bank calculates your earned interest cumulatively monthly, quarterly, or annually, depending on how the interest compounds. Your financial provider may require you to open a new account for the FD or allow you 'fix' the money in an existing account you own. Then you can decide whether to withdraw the interest earned as regular payouts, or you can reinvest it to compound your returns.
The term or period for a fixed deposit can vary between 30 days and 10 years, with interest rates ranging between 3% and 11%. Although the interest rates on fixed deposits are low compared to most investment vehicles, the returns are almost risk-free and much better than a regular savings account. And the longer the term, the higher the interest rate. Some financial institutions and banks even offer a 7-day FD at a considerable rate.
For example, a financial provider can offer 3 months fixed deposit with interest at 2.3%, and for a year, it goes up to 10%. So, an investment of
$100,000 for 3 months earns you interest of
$2,300 on your principal. While you'll earn
$10,000 if you fix the same amount for a year. You can increase your interest if you increase your investment by another $100,000:
$200,000 x 2.3% = $4,600.
Hence, you'll enjoy a higher interest rate and return with a longer-term and or a higher deposit amount.
How to improve your FD returns?
Other ways you can improve your return is by:
Rolling over your original principal after the FD matures. The interest from your FD account is directly credited into your savings account by the bank.
Roll-over the principal and interest. The original principal and the accrued interest are reinvested for the same term and interest rate applicable to maturity. That accumulates or compounds your investment.
Shop for a better interest rate. Ensure you compare the rates from at least three financial providers before settling. The higher the interest rate, the higher your interest yields.
Compounding frequency of interest. Your interest can be compounded monthly, quarterly, semi-annually, or annually. Make all the inquiries about how your financial provider compounds your interest because it affects your return and periodic payouts.
Type of fixed deposit. Financial providers offer two types of FD accounts, which dictates how your interest is invested.
Types of fixed deposit
Cumulative: Most financial institutions only allow you to compound your investment if your fixed deposit is for at least 90 days (3 months). When you invest in a cumulative fixed deposit, your interest is compounded annually and paid at maturity.
Some banks may allow you to withdraw your interests at the end of every compounding period – monthly, quarterly, semi-annually, or at the end of the term.
Simple: If you choose a fixed deposit term below 90 days, the banks will usually calculate your interest based on the principal amount of your investment alone. When you invest in a simple fixed deposit, you can withdraw your accrued interest as payouts periodically.
If you can't wait out your fixed deposit term, you can terminate it before it matures. But you will have to forego some of the accrued interest in your account or incur a penalty. You will also need to pay taxes on the interest earned during a financial year.
How to calculate fixed deposit?
So how is the interest on a fixed deposit calculated? It depends on the type of fixed deposit.
The interest earned on a simple fixed deposit is calculated as simple interest. The formula used is:
matured amount = principal * (1 + (rate * term))
While the interest earned on cumulative fixed deposit is compounded. The interest earned during the previous compounding period is added to the principal for calculation of interest using the formula:
matured amount = principal * (1 + rate / compounding frequency) ^ (compounding frequency * term)
Benefits and Limitations of Fixed deposit
- FD is a very safe, stable, and predictable mode of investment.
- It provides a higher interest rate than a regular savings account.
- You can terminate FD in case of an emergency.
- No limitation to how many FDs you can own.
- The interest rate for FDs is fixed when opening the deposit and remains free of inflation.
- Some financial providers offer preferential interest rates to senior citizens.
- You can take loans against your FD amount.
- Some banks offer a minimum term as low as 7 days.
- You'll earn less interest and may pay a penalty if you make a withdrawal before your FD matures.
- At the end of the term, you may have earned lesser than expected after adjusting for inflation.
- You pay tax on your earnings, which reduces your return.
- FD is best for wealth preservation. It is not a suitable investment vehicle for long term wealth creation or investors with a high-risk appetite.
- The minimum amount to open a fixed deposit in some financial institutions may be too high to consider.