Fixed deposits, also known as term deposits, are popular investment options for individuals looking for a low-risk and reliable source of income. Banks and financial institutions offer fixed deposits and allow investors to earn interest on their savings. The interest rates on fixed deposits are predetermined and are generally higher than those offered on savings accounts. In this blog, we will explore fixed deposits in greater detail and how to use online calculators to calculate returns on investment and interest rates.
What Are Fixed Deposits?
A fixed deposit is a type of investment that involves depositing a fixed sum of money with a bank or financial institution for a fixed period, usually ranging from 1 month to 10 years. The deposit earns a fixed interest rate predetermined at the investment time. The interest rate is generally higher than that offered on savings accounts and is set for the deposit duration. The interest rate on fixed deposits depends on the amount and tenure. How does FD work? When you invest your money in a fixed deposit, you agree to keep your money with the bank or financial institution for a fixed period. In return, the bank pays you a fixed interest rate on your investment.
How to Calculate Returns on Investment?
The returns on a fixed deposit investment can be calculated using the following formula:
A = P x (1 + r/n)^(n*t)
Where:
A = Maturity value of the fixed deposit
P = Principal amount invested
r = Rate of interest per annum
n = Number of times the interest is compounded in a year
t = Number of years for which the deposit is made
Let’s take an example to illustrate the calculation of returns on a fixed deposit investment:
Suppose you invest Rs. 1,00,000 in a fixed deposit for five years at a 6% interest rate per annum, compounded annually. Then, using the formula above, the maturity value of the fixed deposit would be:
A = 1,00,000 x (1 + 0.06/1)^(1*5)
A = 1,34,010
Therefore, the maturity value of the fixed deposit at the end of 5 years would be Rs. 1,34,010.
How to Calculate Interest Rates?
The interest rate on a fixed deposit investment can be calculated using the following formula:
r = (A/P)^(1/n*t) – 1
Where:
r = Rate of interest per annum
A = Maturity value of the fixed deposit
P = Principal amount invested
n = Number of times the interest is compounded in a year
t = Number of years for which the deposit is made
Let’s take an example to illustrate the calculation of interest rates on a fixed deposit investment.
Suppose you invest Rs. 50,000 in a fixed deposit for three years, and the maturity value of the deposit is Rs. 60,000. The deposit is compounded annually. Using the formula above, the interest rate on the fixed deposit would be:
r = (60,000/50,000)^(1/1*3) – 1
r = 0.0585 or 5.85%
Therefore, the interest rate on the fixed deposit is 5.85% per annum.
How Online Calculators Can Help?
Online calculators can be a valuable tool for investors to calculate the returns on their fixed deposit investments. Most banks and financial institutions offer online calculators on their websites that allow investors to enter the principal amount, interest rate on fixed deposit, and tenure of the deposit to calculate the maturity value of the investment. These calculators can also be used to calculate the interest rate on the investment by entering the principal amount, maturity value, and tenure of the deposit. Using an online calculator, investors can accurately calculate the interest earned on their fixed deposit investments and compare the returns offered by different banks and financial institutions before making an investment decision.
Using online calculators to determine the interest rate on fixed deposits and calculate returns is an efficient way for investors to make informed investment decisions. Fixed deposits are popular due to their low risk and guaranteed returns. However, the interest rate on fixed deposits offered by different banks and financial institutions varies based on the amount and tenure of the deposit. Therefore, it is important to compare interest rates before investing. Online calculators provided by banks and financial institutions can help investors conveniently compare different options and select the best investment option that meets their financial goals.
