How FDs Harness Compound Interest

Consumerinfoline.com

Fixed deposits (FDs) are a popular investment choice in India, offering a combination of predictability, stability, and security. But one of the most overlooked benefits of FDs is their ability to harness compound interest.

Compound interest is when interest is earned on interest, resulting in exponential growth over time. The longer your money is invested, the greater the impact of compound interest.

The Basics of Fixed Deposits

Fixed Deposits are a popular investment choice for individuals seeking safety, stability, and assured returns. When you open an FD account with a bank or financial institution like Bajaj Finance, you deposit a specific sum of money for a predetermined tenure, typically ranging from a few months to several years. In return, you receive a fixed interest rate on your deposit, which is generally higher than that offered by regular savings accounts.

Bajaj Finance offer FD interest rates up to 8.60% p.a.

Here’s how FDs harness compound interest:

  1. You start with your invested money (principal).

  2. You get interest on this money.

  3. The interest you earn is added to your invested money.

  4. Now, you earn interest on this bigger sum, which includes both your original money and the interest you earned before.

This cycle repeats itself, resulting in exponential growth over time.

For example, let’s say you invest Rs. 1,00,000 in a FD with an interest rate of 8.05% per annum and a tenure of 5 years. At the end of the three years, you will earn Rs. 26,146 in interest. This interest will be added to your principal amount, increasing your total investment amount to Rs. 1,26,146.

This cycle will continue for the remaining 2 years of the FD tenure. At the end of the 5th year, your total investment amount will be Rs. 1,46,273. This means that you will have earned a total of Rs. 47,273 in interest.

As you can see, compound interest can have a significant impact on your investment returns over time. The sooner you begin investing, the more time your money has to grow, you can calculate the compounding returns on your FD investments using the FD compound interest calculator by Bajaj Finance.
 

Here are some tips for maximising your FD returns using compound interest:

  • Choose a longer FD tenure. The longer your money is invested, the greater the impact of compound interest. With Bajaj Finance you can invest in FD with tenures ranging up to 60 months.

  • Reinvest your interest earnings. This will increase your total investment amount and boost your compounding returns.

  • Explore options like tax-saving FDs that offer both security and tax benefits.

In conclusion, Fixed Deposits serve as an excellent example of how compound interest can work wonders for your financial well-being. By wisely selecting the right FD and diligently reinvesting your interest, you can watch your savings multiply over the years. It is a testament to the timeless power of compound interest and the enduring appeal of Fixed Deposits as a secure and rewarding investment avenue.