Fixed deposits (FDs) are one of the safest and best ways to save money. It is a great alternative to the stock markets where you need to invest a lot of money before getting a decent amount of interest. Fixed deposits are a safe investment option for people who are looking to invest some of their money in the bank. It is a great way to grow your money over time.
As a matter of fact, a fixed deposit is a type of deposit in which the deposit amount is invested for a fixed period. In return for the investment, the investor gets a fixed interest rate till the maturity of the fixed deposit. If you have this type of deposit, you want to know how much it is worth, right? This is where our fixed deposit (FT) calculator comes in!
This handy tool will help you figure out how much interest you will get at the time of maturity. It also helps determine fixed deposit interest rates, which is a big help for the bank employees and their customers. So, read on to find out more about fixed deposits and how to calculate them. That will allow you to get the most out of your fixed deposit and decide on the terms of the deposit.
Definition of a Fixed Deposit
As its name implies, it’s a kind of investment account whereby a certain amount of money is invested at a fixed term and interest rate. Once the term (agreed period) runs out, the investment is either returned to the client (liquidated) or reinvested (rolled over). So, you will eventually get the amount of interest earned when this period expires.
That said, a fixed deposit can be defined as a type of saving account where the depositor agrees to let the lender use the deposited funds for a certain period of time, usually a year. The depositor will be given an interest rate that is higher than what they would get in a savings account. A fixed deposit is a savings account that offers a higher interest rate than a regular savings account. Fixed deposits are also known as term deposits.
A fixed deposit is offered by banks and other financial institutions which offer these services. It is an investment option that helps you to save money while earning more interest on your investment. The bank pays you interest on your money and you can withdraw it after the maturity date, which is usually 12 months or 18 months, depending on the bank’s offer.
Advantages & Disadvantages
The biggest advantage of fixed deposits is that they represent a predictable, safe, and stable mode of investment. They can be terminated in the event of an emergency and there are no limitations to how many deposits one person can own at a time.
On the downside, you may eventually earn a lesser amount than you expect due to inflation. In addition to earning less interest, you might be required to pay the penalty when making withdrawals prior to the FD maturing. If you also need to pay tax on earnings, you will end up having less return in the end.
Fixed Deposit (FD) Formula
Now that you know more about fixed deposits, it is time to learn how to calculate them. All you need to do is apply the following formula:FD = P * (1 + R / N) ^ (N * T)
Where:
- FD is a fixed deposit
- P stands for the principal amount
- R is the rate of interest (yearly)
- N is the compounding frequency (it shows how many times compounding is performed)
- T stands for the term (it is usually expressed as time in years)
Essentially, this is the formula for the matured amount. It is used when calculating fixed deposit interest, providing that you’ve earned the interest on a cumulative fixed deposit.
Matured amount = principal * (1 + rate/compounding frequency) (compounding frequency * term)
In the case of a simple fixed deposit, the interest earned is calculated using the formula below:
Matured amount = principal * [1 + (rate * term)]
Example of Fixed Deposit Computation
As you can see, the way the fixed deposit interest is calculated depends on what type of fixed deposit (FD) account is used. When calculating fixed deposit interest, you actually calculate the maturity amount.
We hope you now have a better idea of fixed deposits. To help you understand how they work, we will provide an example.
- Principal Amount: $10,000
- Rate of Interest (yearly): 3.00%
- Compounding Frequency (per year): 12
- Time in years: 3
If we put these numbers in the FD calculator, the fixed deposit will be $10,940.51. Would you like to calculate it yourself? If so, you should use this formula: FD = P * (1 + R / N) ^ (N * T). Take a look below to see what the calculation looks like.
FD = 10,000 * (1 + 0.03 / 12) ^ (12 * 3)
FD = 10,000 * 1.0025 ^ 36
FD = $10,940.51
What Are the Most Common Types of Fixed Deposits
While there are a variety of types of fixed deposit (FD) schemes to choose from, they are usually divided into two categories based on how they are calculated:
- Simple fixed deposit – It allows you to withdraw the accrued interest occasionally as needed. In case your FD term is below 3 months (90 days), your interest will be calculated based on the amount of your principal alone.
- Cumulative fixed deposit – When investing in this type of deposit, the interest will be paid at maturity and compounded annually. Your fixed deposit (FD) must be at least 3 months (90 days) to be able to compound the investment.
NOTE: No matter what type of fixed deposit you pick, keep in mind that the fixed deposit term can be terminated before the due date if you cannot wait for its maturity. However, you’ll be required to pay taxes besides foregoing a certain portion of the accrued interest to avoid penalties.
How to Enhance Fixed Deposit (FD) Return?
If you are interested in improving your fixed deposit return, follow these simple tips:
- Shop for a higher interest rate to increase interest yields.
- Reinvest both the accrued interest and principal to compound or accumulate your investments.
- After the fixed deposit matures, roll over the original principal.
- Consider the compounding frequency and check how it impacts your periodic payouts and returns.
- Choose the type of fixed deposit that works best for you, as it affects your interest and can help improve your FD return.