Fixed Deposits (FDs) have long been a preferred investment option among Indian investors, providing a straightforward way to grow wealth with predictable returns. Shriram Finance, a trusted name in the NBFC space, offers investors an opportunity to grow their savings over a specific period at a specified interest rate. Fixed Deposits are designed to cater to a wide range of investor needs and goals and it is important to know how FDs work, the various FD calculation methods, and how Shriram Finance FD can be a beneficial choice for your investment portfolio.
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How does Fixed Deposit Work & FD Calculation Methods
Fixed Deposit
A Fixed Deposit (FD) is a financial instrument provided by banks and non-banking financial companies (NBFCs) where an investor deposits a lump sum amount for a fixed tenure at a predetermined interest rate. In both, cumulative and non-cumulative deposit scheme, the interest rate remains constant throughout the tenure, while in a cumulative deposit scheme, the investor receives the principal amount along with the accumulated interest at the end of the tenure and in a non-cumulative deposit scheme, the investor receives the interest payment in periodical intervals (based on his preference – monthly, quarterly, half-yearly, and yearly)
How Does a Fixed Deposit Work?
When you invest in an FD, the process begins with choosing the deposit amount, tenure, and interest payout option. The key features of an FD include:
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- Deposit Amount: The investor deposits a specific sum of money for a fixed period.
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- Tenure: The tenure of the FD can range from a few days to months to several years. The interest rate generally varies depending on the tenure, with longer tenures often offering higher rates.
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- Interest Rate: The rate of interest is fixed at the time of investment and does not change during the tenure, regardless of market fluctuations.
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- Interest Payout Options: Investors can choose to receive interest payouts periodically (monthly, quarterly, half-yearly, or annually) or opt for cumulative interest, where the interest is compounded and paid out at maturity along with the principal.
FD Calculation Methods
The two primary methods used for calculating the interest on Fixed Deposits are Simple Interest and Compound Interest.
Simple Interest Calculation
Simple Interest is calculated on the principal amount for the entire tenure of the FD. The formula used for calculating Simple Interest is: Simple Interest = (Principal × Time (Tenure) × Rate of Interest)/100
For instance, if you invest Rs. 1,00,000 in an FD with a 7% interest rate for a period of 3 years, the Simple Interest would be calculated as:
Simple Interest = (1,00,000*3*7)/100
Simple Interest = 21,000
At the end of the 3-year tenure, you would receive Rs. 1,21,000 (1,00,000 + 21,000)
Compound Interest Calculation
Compound Interest is calculated on the principal amount as well as on the interest that accrues periodically. The frequency of compounding can be monthly, quarterly, half-yearly, or annually.
The formula for Compound Interest is:
A = P(1+r/n) ^nt
Where:
A = Maturity Amount; P = Principal Amount; r = Annual Rate of Interest; n= Number of compounding periods per year; t = Tenure in years
For example, if you invest ₹1,00,000 in an FD with a 7% annual interest rate, compounded monthly for 3 years, the Compound Interest
would be:
A=1,00,000(1+0.07/12) ^ (12*3)
A=1,00,000 × 1.2330=123,300
At the end of the 3-year tenure, you would receive Rs. 123,300
Conclusion
Fixed Deposits remain an attractive investment choice for those seeking to grow their wealth with certainty over a defined period. By understanding how FDs work and the methods used to calculate interest, investors can make informed decisions that align with their financial goals. Shriram Finance FD offers competitive interest rates and flexible options that cater to the diverse needs of investors.
