A fixed deposit can be an ideal investment to let your money make more money. There is a myth around Fixed Deposits (FD), wherein people think their money will be locked up for years. This is not true. You can make an investment in an FD for a minimum of 7 days.
If you can’t commit to a long-term plan, then you can invest for just a year as well. You can earn quite a good rate of interest.
To answer this question, let’s take an example. Let’s say a bank offers 7.01% p.a. compounded annually. If you invest Rs.10 lakh for 1 year, you’ll earn Rs.70,100. This is a sizeable amount for just 1-year investment.
Gone are the days of complex calculations. Nowadays, there is a calculator available online for just about anything. In an FD calculator, simply enter the following details:
The calculator will generate how much interest you will earn and your FD maturity amount. Let’s take another example. If you wish to invest Rs. 2 lakh in an FD for 1 year at 7.51% p.a, the following are your FD maturity details:
FD maturity amount - Rs.5,37,550
Interest earned - Rs.37,550
If you want to calculate the FD interest manually, you can do so by using the following formula:
P (1+ i/n)nt
P = Principal amount
i = Nominal rate of Interest.
n = Number of compounding periods in a year
t = Time or tenure
Let’s take a look at our first example of Rs.10 lakh for 1 year at 7.01% p.a. Note, to know your nominal rate of interest, you need to divide your interest rate by 100. So here, the nominal interest rate is 7.01/100 = 0.0701.
i = 0.0701
n = 1 (since it is annually compounded, there is only one time the bank compounds interest in a year)
t = 1 (1 year tenure)
Thus, we arrive at 10,00,000 (1+0.0701/1)1x1
Simplified to (10,00,000 x 1.0701) = Rs.10,70,100.
Banks sometimes give deposit holders the option of monthly interest payouts. This makes a fixed deposit a stable source of income for just about anyone, especially senior citizens. Banks may allow it depending on certain criteria like AU Bank offers this facility for deposits above 3 months. Whether you are an NRI, senior citizen or under the regular bracket, you can avail this option. However, the monthly interest payout option on FD is not available for joint accounts.
Before investing, it’s wise to do research. Choosing an FD allows you to keep your money safe while you earn interest on it! So even if it’s for a year, investing in an FD is a smart move as the benefits are plenty!