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Fixed Deposit: How Does Compounding Frequency Affect Returns?
Posted on Tuesday, August 29th, 2023 | By IndusInd Bank
SUMMARY: Investors earn interest on both the principal fixed deposit amount as well as the interest accrued through the power of compounding. The longer and more frequent the compounding, the higher the returns. Save more with IndusInd Bank’s online fixed deposits. Use the IndusInd Bank fixed deposit interest calculator to calculate your maturity amount to make an informed financial decision.
“Compound interest is the eighth wonder of the world – He who understands it, earns it. He who doesn’t, pays it.” – Albert Einstein
Learning how to leverage the power of compounding can be one of life’s most important financial lessons.
Compound interest is the secret ingredient that maximises an investor’s fixed deposit (FD) returns. When you invest in a fixed deposit, you earn interest on the principal amount. However, when this accrued interest is reinvested along with the principal, you earn interest on both the principal amount and the previously earned interest. As a result, your returns grow exponentially over time. This is the power of compounding, which multiplies earnings with time and reinvestment frequency.
Read on to learn more about how compound interest in FDs works, how the frequency of compounding affects your returns, and how you can use an FD rates calculator to make an informed investment decision.
Understanding Compound Interest
To know the fixed deposit interest, calculators can be used in the form of free online tools called FD rates calculators. These calculators help investors get an accurate estimate of the future value of their investment amount within seconds.
The tool calculates your returns using the standard formula:
A = P ( 1 + r / n ) ^ n * t
Where:
A = The future value of your investment
P = The principal amount
r = The interest rate at which you locked your FD amount
t = The tenure or period of investment
n = The compounding frequency, or how often the amount will be reinvested in the given period.
Thus, the longer you leave your money invested, the more compound interest you earn. Similarly, the number of times you reinvest during the tenure of your FD is also directly proportional to the value of your investment.
Let us understand with an example how the compounding frequency affects your returns.
How Does Compounding Frequency Affect FD Returns?
The more frequent the compounding, the higher the returns. This is because compound interest is calculated on both the principal amount and the interest already earned.
Say, you invest Rs. 1 lakh in a fixed deposit at an interest rate of 8% per annum for 5 years. You reinvest the interest once each year, i.e., the interest is compounded annually. In the first year of your investment, you will earn an interest of Rs. 8,000.
But what if the interest is compounded quarterly? In this case, the final value of your investment will be Rs. 1,08,243. So, you will earn an interest of Rs. 8,243.
The difference in returns will become more pronounced over a longer period. The tables below contain a comparison of the final amount at the end of each year for five years – compounded annually vs. compounded quarterly.
Table 1: Investing Rs. 1,00,000 in an FD at 8% compounded annually
| Year | Initial investment (Rs.) | Interest earned (annual compounding) (Rs.) | Final amount (annual compounding) (Rs.) |
| 1 | 1,00,000 | 8,000 | 1,08,000 |
| 2 | 1,08,000 | 8,640 | 1,16,640 |
| 3 | 1,16,640 | 9,331 | 1,25,971 |
| 4 | 1,25,971 | 10,078 | 1,36,049 |
| 5 | 1,36,049 | 10,884 | 1,46,932 |
Table 2: Investing Rs. 1,00,000 in an FD at 8% compounded quarterly
| Year | Initial investment (Rs.) | Interest earned (quarterly compounding) (Rs.) | Final amount (quarterly compounding) (Rs.) |
| 1 | 1,00,000 | 8,243 | 1,08,243 |
| 2 | 1,08,243 | 8,923 | 1,17,166 |
| 3 | 1,17,166 | 9,658 | 1,26,824 |
| 4 | 1,26,824 | 10,454 | 1,37,278 |
| 5 | 1,37,278 | 11,316 | 1,48,594 |
Ready to Invest?
Save more and earn more with IndusInd Bank’s online fixed deposits. At IndusInd Bank, you may enjoy flexibility in the interest credit frequency – choose from among monthly, quarterly, half-yearly, and annual options; or get it at maturity!
Use the IndusInd Bank fixed deposit interest rate calculator to estimate your maturity amount, plan your investments, and make the right financial decisions that align with your goals.
Investors can book their online FD instantly – in just three steps – on the IndusInd Bank website. Enjoy attractive interest rates and grow your funds steadily with IndusInd Bank.
Disclaimer: The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. Hence, you are advised to consult your financial advisor before making any financial decision. IndusInd Bank Limited (IBL) does not influence the views of the author in any way. IBL and the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information.
