For the ones looking for a long term wealth creation, a fixed deposit scheme should be included in the investment checklist. The fixed deposit (FD) is considered to be one of the most lucrative financial products which enhances the financial portfolio.
Backing up your retirement period with a fixed deposit helps to escape the never-ending expenses of medicines, travel and house bills. By now, it has become evident what importance fixed deposit holds in our financial portfolio. But, before you approach your nearest bank or financial institution, check whether the scheme opted will be able to accomplish your requirements during the retirement period.
To compute the deposit value at maturity and interest earned on FD, the potential investor can take the help of the fixed deposit calculator. Scroll down to know the procedure to calculate the interest rate on a fixed deposit.
How to Calculate Interest Rate on Fixed Deposit
The fixed deposit investment value can be reckoned by using the FD calculator. The FD calculator also helps to find out how much interest can be earned on an FD. There are two types of interest rate calculator- simple interest and compound interest.
The initial FD amount can be reckoned using the simple interest method while the principal and subsequent interest can be computed using the compound interest method.
Difference Between Simple Interest and Compound Interest
Before investing in an FD, it is important to figure out the interest that will be earned on the invested amount. The FD rate can be calculated in two ways. Under the simple interest method, the interest rate is reckoned on the initial amount. While under the compound interest method, interest is calculated on the principal and thereon.
To get a clear idea about the two methods, let’s consider an example.
Suppose the invested amount is Rs.1 Lakh in an FD for a time period of 2 years. The interest rate offered is 10% per annum that is calculated on a yearly basis.
Under the simple interest method, the interest will be computed on the principal amount of Rs.1 lakh. So, the interest earned over the period will be as follows:
1st Year: Rs.1,00,000 X 10%= Rs.10,000
2nd Year: Rs.1,00,000 X 10%= Rs.10,000
Total interest gained at the end of the tenure (2 years)= Rs 20,000
Maturity Value received at the end of tenure (2 years) = Rs.1,00,000+Rs.20,000= Rs.1,20,000
On considering this method, it has to be noted that the interest is calculated and compounded annually. The interest earned has to be added to the principal for the subsequent interest calculations.
The interest to be earned using this method can be computed in the following manner:
1st Year: Rs.1,00,000 X 10%= Rs.10,000
New principal amount= Rs.1,00,000+Rs.10,000=Rs.1,10,000
2nd Year : Rs.1,10,000 X 10%= Rs.11,000
Total interest gained at the end of the tenure (2 years)= Rs.21,000
Maturity value at the end of the tenure(2 years) = Rs. 1,00,000 + Rs.21,000= Rs. 1,21,000
It can be figured out that the interest earned under compound interest is higher in comparison to the interest under the simple interest method. This basically happens because the interest earned annually is added to the principal amount and then it becomes the basis of interest calculation for the next period.
Even if the simple interest is easier to calculate than the compound interest, yet using the FD calculator eliminates the trouble of manual calculation of the interest and provides the investors with accurate information regarding the FD maturity and interest value earned on the invested amount.
It is important to throw light on the compounding frequencies. The compounding frequencies can be quarterly, half-yearly or annually. It may vary between FD schemes.
How to Calculate the Monthly Interest Earned on FD?
The FD interest rate calculator can be used to calculate the monthly interest rate earned on the FD. The calculator does not just enhance the speed and efficiency of the computation of the fixed deposit interest rate, but it also reckons the approximate interest and the maturity amount. The FD calculator is considered to be one of the most essential tools to pre-determine the earnings on the investment. Instead of going for a manual calculation, it will be convenient for the investor to use an FD calculator to ascertain the maturity amount.
To compute the maturity amount and the interest earned, the potential investors have to input the following details:
- Deposit amount: The amount the investor is willing to invest in the scheme.
- Deposit tenure: The period for which the investor wants the amount to be invested.
- Deposit interest rate: The rate of interest offered under a particular scheme.
Upon entering the key details, the accurate result will be displayed instantly.
Important Points to Consider While Calculating the Interest on the FD
- One needs to note the compounding frequency. For instance, if the interest rate is stated per annum, it denotes a yearly interest rate. Similarly, to calculate the interest half-yearly, the rate that has to be considered will be 10% X 6 months out of 12 months and so on.
- If the interest rate is calculated every month then under this case the annual rate will be considered on a per month basis.
- Compound interest is a great way to maximize returns. It should be opted by the ones who want to invest for a long period of time.
The highest FD interest rates can be configured by entering the details in the FD calculator. It is advised to know the value of the investment before applying for one by using this financial tool.