Impact of Interest Rates on Fixed Deposits: Why You Should Time Your Investment

Fixed deposits (FDs) are considered to be a safe haven for investors during uncertain times. It offers assured returns on your deposits, depending on the tenor and type of payout option. Therefore, it is crucial that you choose the right FD scheme based on your investment objectives.

While there are multiple factors that can influence your overall returns, the interest rates and the types of payout options are likely to have the biggest impact. Learn more about the different types of FD schemes and interests applicable on fixed deposits.

Types of Fixed Deposit Interest

There are two types of interest rates applicable on FDs - Simple Interest and Compound Interest. While simple interest is earned only over the principal amount, compound interest is earned on both the principal and the interest.

These can significantly impact your overall interest payout and can have varied results at the end of your tenure.

Learn how to calculate interest for both:

- Simple Interest 

The formula for calculating simple interest is -

Principal x Rate of Interest x Time Period / 100

For example, if you deposit ₹1 Lakh at an interest rate of 7% p.a. for 5 years, then you can calculate it in the following way:

1,00,000 x 7 x 5 = ₹35,00,000

35,00,000/100 = ₹35,000

This means that you can earn an interest of ₹35,000 on your FD amount in 5 years. 

- Compound Interest

Here, the formula for calculating compound interest remains the same as that of simple interest. However, the principal amount increases each year due to the addition of that year’s interest amount, as it is considered for an increased yield.

For instance, on depositing ₹1 Lakh at an interest rate of 7% p.a. for 5 years, the interest rate can be calculated as follows:

For Year 1 -

Multiply your principal amount by the interest rate and divide it by 100

1,00,000 x 7 / 100 = 7,000

For Year 2 -

Add the interest amount to the principal and multiply it by the interest rate and divide it by 100

1,07,000 x 7 / 100 = 7,490

This return after the second year will then be added to your principal, bringing the total to ₹1,14,490. Similarly, the interest is calculated for the remaining three years and added to the principal.

You can also make use of an FD interest rate calculator to quickly determine your earnings, by mentioning your potential principal amount, tenure, and interest rate.

Types of Fixed Deposits

Regular FDs

Regular FD accounts allow you to park your funds for a fixed tenor, usually ranging from 7 days to 10 years or more. The interest rates offered are much higher than a regular savings account, ranging from 6%p.a. to over 9% p.a., which can be ideal for long-term earnings.

Some issuers also offer additional rates of 0.25%-0.50% for senior citizens. For instance, Bajaj Finance’s fixed deposit scheme offers a maximum interest rate of 8.60% p.a. on certain tenures.

Cumulative FDs

In a cumulative FD, the interest is added to your overall sum deposited and paid on maturity. The interest rates offered by cumulative FD are generally much higher than those in non-cumulative schemes.

Non-cumulative FDs

This FD scheme allows you to choose the interest payout frequency, - annual, half-yearly, quarterly or monthly. This can help with meeting your short-term requirements. These could be for EMIs, bills, rent, or your other daily/recurring expenses.

Corporate FDs

Corporate FDs are offered by NBFCs/HFCs or certain private financial institutions, which provide guaranteed earnings and interest rates usually higher than regular bank FDs. These can let you choose between regular income with pay-out options or the cumulative option.

Tax-saving FDs

The primary purpose of tax-saving FDs is to help you tax benefits and exemptions of up to ₹1.5 Lakhs under Section 80C of the Income Tax Act, 1961. However, these FDs come with a mandatory 5-year lock-in period, and no provision of an OD against your FD, thereby providing no scope for any premature withdrawals.

Flexi FDs

Flexi FDs provide you the benefit of high interest rates of FDs coupled with the liquidity option of a savings account.

Senior Citizen FDs

Senior citizen FDs come with a higher interest rate than their standard counterparts, and are applicable to individuals over the age of 60. Normally, an additional rate ranging between 0.25% and 0.50% is offered to senior citizens over the base return on investment.

Floating Rate FDs

Here, the interest rate is not fixed and instead keeps shifting on the basis of a reference rate, which gets reset regularly during the term of the deposit.

However, the interest amount is paid on the floating FD quarterly on the last day of every month.

Now that you know about how interest rates can impact your overall payout,and the ways to go about when choosing the right FD; don’t wait any further and begin your savings journey, today!

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