If you’re looking to make a short-term investment but max out on your earnings, a Fixed Deposit (FD) could be your safest bet. FDs are great because you can choose whether you’d like to invest for just 7 days or lock your money away for a good 10 years.
The interest you earn depends on the amount you invest. If you invest with AU Bank in a 6-month FD, you will earn up to 8.80%* p.a. interest. So, let’s take a few examples (keep in mind AU Bank compounds interest annually). *T&Cs apply.
The bigger your investment, the bigger the payout.
Usually, people don’t like to look at formulas. They are difficult to understand and doing the calculations seem too hard. So, you’ll notice how banks and a lot of other online portals provide calculators for just about anything. In a fixed deposit interest calculator, you’ll find the options to enter the following details:
Once you do this, the calculator will show you the FD interest amount you can earn as well as your maturity amount.
Though formulas seem complex, once you understand them, it’s actually really simple. You can calculate your FD maturity amount using this formula:
P (1+ i/n)nt
P = Principal amount
i = Nominal rate of Interest
t = Time or tenure
n = Compounding frequency
For nominal rate of interest, you need to divide your interest rate by 100. So, 6.90/100 = 0.069. Let’s show you how to calculate FD maturity amount by using an example. Say you invest Rs.10 lakh for 6 months (i.e., 0.5 years) at 6.90% p.a., you get
i = 0.069
n = 1 (since it is annually compounded, there is only one time the bank compounds interest in a year)
t = 0.5
Thus, we arrive at 10,00,000 (1+0.069/1)1x0.5
Simplified to 10,00,000 x (1.069)0.5
1.069 to the power of 0.5 = 1.069 itself
So, 10,00,000 x 1.069 = Rs.10,69,000
It may seem complicated, but with a little study, you’ll easily get the hang of it.
This depends on what you want to get out of your FD. Considering it is only for 6 months, letting the interest accumulate in your deposit account would be better. Here’s why:
Interest will be calculated on the principal amount + the interest you earn every month. So, your maturity amount will be higher if you choose payout upon maturity.
However, if you need a monthly income, then the monthly payout option is a great one! Monthly payout is available for anyone, whether you are a regular citizen, a senior citizen or an NRI.
Ensure you bank provides you with this option. For example, AU Bank gives you this option if you invest for 3 months or more.
If you have idle cash that you don’t need for at least 6 months, investing in an FD is a quick and safe way to earn a little in interest. So, go ahead and invest in a fixed deposit! Your money does all the work for you while you reap the rewards of it.