FD interest rates: Understanding how it works and how to maximise your returns

A fantastic approach to increasing your wealth is through investments. That is not all, though. Your investments can help you achieve short-term objectives and establish a contingency fund to handle unforeseen financial demands. Fixed deposits are a favourite across the nation despite the wide range of investing possibilities. 

Fixed deposits have always been a good choice for risk-averse investors. All types of investors find it to be a desirable alternative, thanks to FD interest rates. Understanding how FD functions is the greatest approach to getting the most out of your investment. Simply defined, you invest a lump sum for a specific length of time at a predetermined interest rate with any financial institution. Your capital earns interest throughout the tenor.

How does FD interest work?

You can retain your money with banks, NBFCs, and other financial institutions in return for FD interest. They can then operate their lending vertical thanks to the money deposited.

Financial institutions give you various options for parking your money with them. One of them is fixed deposits. Unlike other options like a savings account and you might not be able to access the funds in a fixed deposit before the FD maturity date.

However, you have complete discretion over the tenor of the investment but The length of the lock-in time might range from 7 days to 10 years. Remember that the length of time you invest determines the interest rate on your fixed deposit.

Things to consider

interest rates for senior investors are higher than for non-senior investors. Your FD type affects the interest you receive on it as well. The two basic categories of FD are and broadly speaking, cumulative and non-cumulative.

You get your money back plus any interest that accrued throughout the tenor. You gain from compound interest with a cumulative FD. Your capital and interest earnings continue to generate interest at the predetermined rate based on the frequency.

A non-cumulative FD and it offers interest in instalments and You might not, however gain from interest compounding. As a result this could have a lower effective yield than a cumulative FD.

You can often choose a monthly, quarterly, half-yearly, or annual payout choice in a non-cumulative FD. Here is an illustration of how a fixed deposit works:

These are your earnings with an investment of Rs. 3 lakh over a term of 44 months- 

Payout optionNon-senior citizen investorSenior citizen investor
Interest rate in %Interest earnings in Rs.Interest rate in %Interest earnings in Rs.
Monthly7.671,9187.911,978
Quarterly7.725,7907.965,970
Half-yearly7.8011,7008.0412,060
Yearly7.9523,8508.2024,600
At maturity7.9597,1358.201,00,517

How is FD interest calculated?

Two different calculations can be used to determine the total earnings and interest that can be generated on FDs.

  1. Simple interest: 

Formula- P*R*T

Here ‘P’ stands for the principal amount, ‘R’ for the interest rate, and ‘T’ for the fixed deposit’s duration.

  1. Compound interest: 

Formula- P+[(1+r/n)∧ t]-P

‘P’ stands for the principal amount, ‘r’ for the interest rate, ‘n’ for the number of years, and ‘t’ for the frequency of compounding.

How to increase your fixed deposit returns?

  • Focus on the yields- Consumers frequently tend to merely look at the interest rates offered on fixed deposit accounts. But it is crucial also to keep an eye on the yields. On your term deposit plan therefore some plans offer compound interest on an annual basis and while others do so quarterly. In this instance, it should be highlighted that the latter scenario and will result in better overall yields. 
  • Go for short-term FDs- In general, it has been observed that fixed deposit interest rates increase along with inflation. It is advised that you invest in a short-term fixed deposit program. You may choose from different FD plans like bank FD or post office FD. Your fixed deposit program returns will be maximised with the help of this investment strategy.
  • Try out cumulative fixed deposit schemes- The mechanism of payout is the primary distinction between a cumulative FD and a non-cumulative FD. The cumulative term deposit plans offer the payoff at the conclusion of the investment tenure. A cumulative term deposit plan will be your most excellent option if building money is your primary goal. Additionally, interest rates for senior investors are higher than for non-senior investors. Your FD type affects the interest you receive on it as well. The two basic categories of FD are and broadly speaking, cumulative and non-cumulative.