Compound Interest in Fixed Deposits: A Comprehensive Guide
FD interest rates. However, you should keep in mind that issuers offer two interest calculations: simple and compound. Opting for the latter can work wonders for your long-term savings.
The compounding effect can help increase your returns over time, making FDs an appealing choice if you want to maximise your earnings and financial growth. Read on to learn about the compound interest in fixed deposits, how fixed deposit interest is calculated, and more. When you deposit a certain amount of money in a fixed deposit, the respective financial institution pays you interest on the invested amount.
As mentioned, this interest can be either calculated as simple or compound interest. Opting for the compound mode lets you earn interest on your principal deposit and on the interest that you have already earned. Simply put, the interest accrued gets reinvested, and you earn a lump sum at maturity.
The maturity amount contains your principal investment, along with the accrued interest over a specific tenor. The power of compounding actively multiplies your money and accelerates growth as compared to simple interest. While simple interest applies only to your principal amount, compounding interest means that you are earning interest on your interest.
This is precisely why compound interest is highly preferred to simple interest in a fixed deposit. With this consistent reinvestment of interest on your deposit over an extended time period, you can accumulate sizeable earnings within a stipulated timeline. The more frequently your interest compounds, the greater will be your total compound interest earnings.
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