Finance

Simple versus compound interest rates for fixed deposits

Fixed deposits are a great way to invest your funds, especially on a long-term basis. They also offer a great protecting against the volatile conditions of the financial market. With this termed deposit, you can invest a fixed amount and earn a return on the investment. Depending on the amount you wish to invest, you can easily earn a return on investment depending on the tenure.

However, you can earn an interest on your fixed deposit through two types. You can either opt for the simple interest method or the compound interest method. Given below are the details of the difference between these two types:

Simple Interest fixed deposit:

Simple interest is best for those who want to earn a small amount, and use it for any financial requirements at a fixed time. This is best for those who want to invest their funds, and yet have some access to using it. although the investment tenure is fixed, you will still have access to the interest that is earned and deposited at the ROI tenure.

Under the simple interest method, your interest is calculated on the initial deposit amount or the principal amount. However, in most cases, the interest amount will mostly calculate on the principal amount. Most of the interest rates are calculated on a quarterly, half-yearly or annually basis. You can use the fixed deposit calculator to get the ideal amount that will suit your needs.

Compound Interest fixed deposit:

Compound interest, also known as the reinvestment option is great for maximizing returns on a long term basis. This also works well for those who would want to invest for a fixed yet long period of time In this case, the longer the deposit period, the better will be the returns on reinvestment.  Reinvestments under this scheme provide a higher return, especially for those who prioritize liquidity. This is also the best solution for long term deposits.

In the compound interest method, the interest is calculated on the principal and the interest that earned at each maturity period. With the interest that is earned in this form, the compounded outcome is much higher. This is because the interest that is earned is added to the principal amount. Thus, this becomes the basis of the interest calculation. To know how much you can earn with each compounding interest, you can always use the fixed deposit calculator to get the amount required. However, the compounding interest will differ in the different FD schemes offered by the institute. Normally, a bank or financial institute will offer scheme frequencies that are quarterly, half-yearly or annually.

If interest is calculated every month, the annual interest rate will have to be considered on a per month basis. Likewise, if it’s calculated every half-year, the annual interest rate will have to be calculated on a half figure.

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