Understanding Fixed Deposit Interest Rates

When you invest in Fixed Deposits (FDs), rest assured you will earn guaranteed returns. FD interest rates are higher than that of Savings Accounts, which helps you maximise your savings potential. But, how does FD rates work? Why banks increase or decrease FD interest rates? 
 

In this blog, we have explored everything from how FD rates are set to tips for choosing the right tenure, and how to make the most of your investments. 

What are Fixed Deposit Interest Rates?

Fixed deposit interest rates are the interest you earn on your fixed deposit account. The interest remains fixed throughout the tenure of your deposit. However, the interest pay-out pay differ depending on the type of deposit you select - cumulative FDs or non-cumulative FDs.
 

For cumulative FDs, the interest is paid out at the time of maturity, whereas non-cumulative FDs facilitate periodic interest pay-outs - monthly, quarterly or annually. 

How is FD Interest Calculated? 

FD interest can be calculated using two methods - the simple interest method and the compound interest method.
 

So, what's the difference between the two? With simple interest, the interest is earned only on the principal amount, whereas with compound interest, the interest is calculated both on the principal a amount and the interest accrued, leading to higher overall returns.
 

The formula for simple interest calculation is:
 

(P x R x T/100). where, P= Principal amount; R = Rate of interest per annum; T= No. of periods (in years).
 

The formula for compound interest calculation is:
 

A= P(1+r/n)^n*t, where, A is the maturity amount, P is the principal amount, r is the annual interest rate (expressed as a decimal), t is the tenure in years, n is the number of times interest is compounded per year.
 

However, manual calculations are time consuming and may leave room for errors. As a better alternative, use a Fixed Deposit ROI Calculator to check your maturity amount and the interest earned. 

How is Fixed Deposit Maturity Amount Calculated? 

We have used both methods so you can understand the impact of compounding on your returns.
 

With simple interest method, here's how your returns would look like:
 

Maturity Amount = 50,000 + (50,000 x 6 x 5)/100
 

Maturity Amount = 50,000 + 15,000
 

Maturity Amount = ₹65,000.
 

Now, let's understand this with the compound interest method:
 

The formula is A= P(1+r/n)^n*t. 
 

Let's say you deposit ₹50,000 at an interest rate of 6% per annum for 5 years, compounded annually. 
 

A=50,000×(1+0.06/1)1×5=₹66,910.
 

So, at maturity, you will receive ₹66,910. 
 

The examples show how your money grows via compounding.
 

Disclaimer: The above calculation is for informational and educational purposes only. Ujjivan Small Finance Bank does not take any responsibility regarding the accuracy of the information provided. 

How to Select the Right Fixed Deposit Interest Rate?   

1. Consider Tenures and Financial Goals 

It's a bit tricky. For shorter tenures, you may get higher rates. For example, Ujjivan SFB offers 8.25% p.a. for an FD tenure of 12 months. For longer longer tenures, the interest rate could be lower. So, should you go for the shorter tenure just because the interest rates are higher?
 

Well, it depends on your financial goals. If you want to buy a two-wheeler in one year, you can open a short-term FD and grow your initial deposit via higher interest rates. Upon maturity, you can withdraw the amount and use it to fund your two-wheeler.
 

But when it comes to long-term growth, it's important to extend your investment horizon. Even if the rates are lower, you would earn more if you stay invested for the long term - thanks to the power of compounding. Kindly note that we're not considering post tax returns.

Key Factors Influencing FD Rates 

When considering fixed deposits (FDs) as an investment, several key factors play a crucial role in determining the interest rates you receive. Let's explore these factors:
 

• Economic Conditions: Generally, if inflation is high, FD rates tend to rise.  
• Monetary Policies: RBI’s decisions on repo rates may directly affect bank FD rates.
• Bank-Specific Factors: Each bank has its liquidity needs which can influence the interest rates offered.
• Duration: Typically, the longer the duration of the FD, the higher the interest you would earn . 

Comparison of Tenures and FD Rates

Here are the interest rates for domestic fixed deposits at Ujjivan Small Finance Bank:

Data as on 3 October 2024. Interest Rates are subject to periodic changes and the applicable interest rates will be given based on the date and time of receipt of the funds by the Bank.