A fixed deposit is a great investment option that’s not only safe, but also offers guaranteed returns. Despite the positives, many people often feel that the returns on a fixed deposit are lower than some other options. However, an FD has one major advantage on its side – the magic of compounding.
It utilizes the power of compounding, which basically allows you to earn interest on interest through reinvestment. Given enough time, a fixed deposit can give you attractive returns on your investment through the power of compounding.
How much can you actually earn through an FD?
An example can help you really understand how much of a difference a fixed deposit can make over the long term. And here’s where an FD calculator comes in handy. This nifty little online financial tool can calculate the returns of a fixed deposit in an instant. All that you need to do is input the relevant details.
There are multiple FD calculators online to choose from and all of them pretty much work in the same way with some minor differences here and there. On the other hand, if you prefer the old-fashioned way of manual calculation of the returns on an FD, here’s how you can do that.
Let’s assume you wish to invest Rs. 15 lakhs in a fixed deposit for a tenure of 10 years. And the current interest rate on fixed deposits is 6% – with an annual compounding frequency.
So, how much will you be earning at the end of the 10th year? To find out, we’re going to have to use the following formula.
|Maturity value of the FD at the end of the tenure = P x [1 + (R ÷ 100)]NT|
- P refers to the principal investment amount
- R refers to the rate of interest
- N refers to the compounding frequency
- T refers to the tenure
Since we already have all of the above values, let’s substitute them in the formula to arrive at the FD’s maturity value.
Maturity value of the FD at the end of the tenure:
= Rs. 15,00,000 x [1 + (6 ÷ 100)]10
= Rs. 15,00,000 x 1.79084
= Rs. 26,86,271
So, at the end of the 10th year, you get around Rs. 26,86,271 in your hands. That amounts to an interest alone of Rs. 11,86,271 (Rs. 26,86,271 – Rs. 15,00,000)
There you have it. By investing around Rs. 15,00,000 in an FD, you get to earn around Rs. 11,86,271 as interest at the end of 10 years. All of this without having to do anything at all.
As you can see from the above example, a fixed deposit is one of the easiest ways to earn a significant amount of return on your investment. Thinking of investing in an FD? Before you do, always ensure to use an FD calculator. You can also quickly use the online FD calculator on Finserv MARKETS to double check the results and get an idea of how much you can earn from your investment. You can also take a look at the many FD options available on Finserv MARKETS and choose a good investment option accordingly.