Do you know the returns your fixed deposit will give you?

Fixed deposits offer guaranteed returns over investment. We explain how you can estimate the growth of the deposit over its tenure.

Investments are those financial instruments that help us increase our current income to a level that is commensurate with future needs. One may require money for a variety of reasons. Depending only on the monthly income cannot help to create wealth – an extra dimension of regular saving and investment must be introduced to augment current monies for the future.

Every person has a range of obligations to fulfil. On the personal front, these can be paying for children’s education, buying a house, buying a car/bike, creating a retirement fund, emergency medical expenses, maintaining parents’ home, etc. On the professional front, one may wish to buy office space, invest to buy machinery and employ more staff, open a factory in another location, expand operations to other territories, etc.

The point is, all of these require money at regular periods of time. And like we mentioned above, depending only on your monthly income cannot help you out – there comes a time when these varied needs are met only by making your money work for you even while you sleep. For this, it is essential that one makes investments that compound one’s money for future use.[1]

Are you averse to investments?

Normally, novice investors would not prefer to make investments because they fear losing all their money. This hardly happens if you invest in the right instruments. You will come across a lot of investment opportunities that promise to double or triple your money in five years or seven years. It is advisable to stay away from these – these are normally fly-by-night operations that you will lose money in.

At the same time, it is true that there are no ‘risk free investments’. Every investment has a measure of speculation and risk associated with it. However, some instruments have a lower risk propensity than others, and these must be looked at in better detail. An example of such an investment is a fixed deposit (FD).

What is a fixed deposit?

A fixed deposit is one of the most popular investment options in the country today. It is a sum of money that is deposited with a bank’s FD account for a certain tenure of time, and at a certain interest. Once the tenure is up, the deposit is said to mature. At this stage, the initial investment is returned to the investor, along with the interest earned on it.

The FD account has several advantages. Firstly, the interest payable on the deposit is constant throughout the tenure of the deposit – it does not fluctuate as per the market rate changes. Secondly, this is an investment with a lower propensity for risk. Thirdly, it is possible to map the returns on the investment, since the interest remains unchanged.[2]

 

 

Mapping the returns on the fixed deposit

Fixed deposits offer returns on the principle of compounding. The larger the deposit, the more interest is earned on it. Correspondingly, the longer the tenure of the deposit (up to 10 years), the more is the earning on it.

Now that you are considering creating a fixed deposit account, it is worthwhile to know how to map the estimated returns on it. This is easily done by means of using an online fixed deposit calculator. The calculator computes your projected returns on the investment in real time, so you have an idea of how much your investment will grow by maturity.

This is how the fixed deposit calculator works: Enter the amount of money you wish to deposit. Then enter the desired tenure. Based on the bank’s interest rate for the chosen tenure, the calculator shows the final maturity amount for the deposit. You can then continue manipulating the figures to arrive at the desired maturity amount.

A few things to consider about FD accounts…

Most people believe that there is no tax liable on the fixed deposit earnings. This is not true!

  • The returns on the fixed deposit are taxable, if the interest earned is higher than Rs 10,000. Thus, it is important to take this factor into account when computing the actual gains on the deposit. Do make sure to minus the taxable earning and see how much the actual earning is.[3]
  • The deposit must ideally be a large one so as to beat inflation. Most fixed deposits are not able to beat inflation, so the actual earnings are not as high as initially assumed.
  • The most reputed banks in India today offer business FD accounts as well as individual fixed deposits. They also help the customer book the fixed deposit online.
  • If you are looking for higher returns and are faced with making a choice between fixed deposits and recurring deposits, you should choose the former option. As mentioned earlier, the returns on fixed deposits are a result of compounding of interest, and hence, they are higher on FD accounts.
  • The rates on fixed deposits reduced after demonetisation on November 8, 2016. Today, the best banks are offering a minimum of 7% interest and up to 7.5% interest on long tenure fixed deposits. The rates for senior citizens’ FD accounts is about 8%.[4]

[1] http://www.investopedia.com/ask/answers/153.asp

[2] http://www.business-standard.com/article/pf/why-invest-in-fixed-deposits-115072800517_1.html

[3] http://www.firstpost.com/money/how-are-fixed-deposits-taxed-heres-everything-you-need-to-know-1966863.html

[4] http://www.idfcbank.com/content/dam/idfc/image/other-pdfs/Interest%20Rate.pdf