1. Compound Interest:
- Most Common for FDs: The majority of banks and financial institutions use compound interest for FDs. In compound interest, the interest earned on the principal amount is reinvested, and interest is calculated on the new total (principal + interest). This process continues for the entire tenure of the deposit.
- Frequency of Compounding: Interest can be compounded annually, semi-annually, quarterly, monthly, or daily, depending on the terms of the FD. The more frequently the interest is compounded, the higher the return.
Formula for Compound Interest:
A=P(1+rn)ntA = P \left(1 + \frac{r}{n}ight)^{nt}A=P(1+nr)nt
- AAA = Maturity amount
- PPP = Principal amount
- rrr = Annual interest rate (decimal)
- nnn = Number of times interest is compounded per year
- ttt = Time period in years
2. Simple Interest:
- Less Common for FDs: Some financial institutions or specific FD schemes may use simple interest, especially for shorter-term deposits. In simple interest, the interest is calculated only on the principal amount and does not include interest earned on interest.
- No Compounding: Since interest is not compounded, the total interest earned is straightforward to calculate.
Formula for Simple Interest:
SI=P×r×tSI = P \times r \times tSI=P×r×t
- SISISI = Simple Interest
- PPP = Principal amount
- rrr = Annual interest rate (decimal)
- ttt = Time period in years
Note: Always check with the bank or financial institution offering the FD to understand the interest calculation method and frequency of compounding. This will help you accurately estimate the returns on your investment.
You can use an FD calculator to quickly determine the maturity amount and interest earned on your fixed deposit based on the principal amount, interest rate, and tenure.
