While scores of investors go gaga about fancy calculators that focus on crypto assets or stocks, the humble Fixed Deposit (FD) calculator is largely ignored. Reading the article will help you calculate interest rates and learn to get that FD calculator to work in a breeze.
Understanding an FD calculator
A fixed deposit calculator is a tool that helps calculate the interest earned on a fixed deposit. It does the math based on the principal amount, interest rate, and tenure.
To use the calculator, put in these three things. The calculator will display the interest earned and the maturity amount.
How is the FD amount calculated?
You must use the simple interest formula to calculate the FD amount due at the end of your maturity period. The simple interest formula is as follows:
Simple Interest = (P * R * T) / 100
P = Principal amount
R = Interest rate per annum
T = Time in years
So, you see, the formula considers the FD’s principal amount, interest rate, and tenure. And if you need to calculate the compound interest, you can use the expanded version of the formula:
Compound interest = P * (1 + R / n)^(n * t) – P
The rest of the terms are the same as above, but there are two additions.
n = Number of times the interest is compounded in a year, and
t = Period in years
The compound interest is naturally higher than the simple interest, thanks to the power of compounding.
A fixed deposit calculator also uses these formulas for the calculation.
How do FD calculators work?
A host of FD calculators available online will calculate both types of interest. They all work by using the formulas above. You need to enter relevant data in the correct places, and the interest rate will show up.
An example of FD calculation
Suppose you invest ₹50,000 in a fixed deposit for a tenure of 2 years. Let’s assume the annual interest rate is 7.5%, compounded quarterly. Using the compound interest formula, the maturity amount is as follows.
P = ₹50,000
R = 7.5% per annum
n = 4 (This is the compounding frequency, as the interest is compounded quarterly)
t = 2 years
So the maturity amount is = P * (1 + R / n)^(n * t)
= 50,000 * (1 + 7.5 / 400)^(4 * 2)
Benefits of using an FD calculator
The benefits of using an FD calculator are as follows:
- Easy and quick calculation: Calculators are easy to use and quick. So you can use it to compare different FD schemes to the best returns in no time.
- Accurate results: Using an FD calculator ensures the accuracy of results, eliminating human error.
- Less effort: Manually calculating the interest and maturity amount can be tedious, especially if you have multiple FDs. An FD calculator spares you the effort by providing instant results.
- Helps in financial planning: A calculator helps plan your finances better, giving you a clearer idea of how much you can expect to earn from the FD. This encourages you to make informed investment decisions.
- Provides transparency: An FD calculator makes for transparency in calculating interest and maturity amounts. This can help you avoid confusion or disputes with banks or financial institutions.
Things to consider while calculating FD
While calculating the returns on your FD, there are a few things that you should consider. These include:
- Principal amount: This is the amount you deposit in the fixed deposit. It is important to input the correct principal amount while using a calculator. Doing so ensures you get accurate results.
- Interest rate: The rate at which your investment grows is determined by the interest you receive. For accuracy, entering the correct interest rate while using an FD calculator is important. The rate varies with different banks or depositors. Senior citizens, for instance, receive better rates.
- Tenure: The tenure is the duration for which you invest your money. It is important to enter the correct tenure while using an FD calculator. This is the key to getting accurate results.
- Compounding frequency: This is the frequency at which interest calculation is done, and money is credited to your account. It is important to input the correct compounding frequency while using a calculator.
- Premature withdrawal penalty: If you plan to withdraw your fixed deposit before maturity, there may be a penalty. Take this on board while calculating the returns on your fixed deposit.
The formula to calculate the interest earned on a fixed deposit depends on the type of interest rate (simple or compound) the bank or financial institution offers. An FD calculator works by using this formula. It provides an estimate of the expected returns based on the principal amount, interest rate, and tenure.