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How FD Interest is Calculated for NBFCs?

As an investor, a fixed deposit is a valuable addition to your portfolio as it provides assured returns at profitable interest rates. This is especially true for company fixed deposits as the interest rate is typically higher than that offered by banks. Since you earn a fixed FD interest rate through the tenor, it’s important that you know how your interest is calculated and secure the highest rate right from the start.

Here’s a quick guide that will help you understand how NBFCs calculate interest on your FD.

You can earn compound interest

A compound interest system means that the interest you earn is added to your principal after a fixed period, or in other words, reinvested. Therefore the amount you earn over the course of the tenor is higher. Every time the interest you have earned is reinvested, the principal amount increases.

Assume that you invest a sum of Rs.1 lakh in a Bajaj Finance Fixed Deposit for 3 years with interest payout only at maturity. Being a new customer, you will get an interest rate of 8.75%. At the end of 3 years, the total amount that you will earn will be Rs.1,28,614, where the interest amounts to Rs.28,614. On the contrary, if you choose quarterly payouts instead of one payout at maturity, at the end of 3 years you will earn Rs.1,25,440, where the interest is Rs.25,440. The quickest way to see how compounding benefits your investment is through an FD interest calculator.

Your returns depend on the compounding frequency

As mentioned earlier, the interest accrued is reinvested every time it is compounded. This means that the higher the compounding frequency, the greater are the returns you can earn. To understand better, compare the maturity amount for various compounding frequencies when you take an FD of Rs.2,00,000, with a tenor for 1 year and an interest rate of 8%.

  1. When interest is compounded monthly: Rs.2,16,599.90
  2. When interest is compounded quarterly: Rs.2,16,486.43
  3. When interest is compounded bi-annually: Rs.2,16,320
  4. When interest is compounded annually: Rs.2,16,000

Now that you know how NBFCs calculate your interest earnings, take a look at the factors that influence the FD interest rate you get.

The principal amount

FD issuers create slabs for various investment amounts and assign FD interest rates for each slab. While a higher amount could fetch you a higher rate, this relationship is not always proportionate. It’s best to check the issuer’s chart to understand the interest rate applicable for your investment amount.

The payout frequency

When you open an FD, you can either opt to receive returns along with the principal at maturity, or you can receive payouts periodically, on a monthly, quarterly, half-yearly, or yearly basis. In general, the more frequent your payouts are, the lesser you earn.

The customer type

Issuers will often have different rates for different customers. For example, take a look at the FD interest rates you can get for a 3-year Bajaj Finance Fixed Deposit with interest payouts at maturity.

  1. If you are a regular, new customer: 8.75%
  2. If you are an existing customer: 9.00%
  3. If you are a senior citizen: 9.10%

The investment tenor

When you invest your finances for a long tenor, issuers reward you with higher interest rates. Typically, FD interest rates peak when the tenor reaches 36 months. Post this tenor issuers keep the interest rate constant, or drop it marginally. So it’s in your best interests to pick a short- to mid-term FD to earn inflation-beating returns.

The RBI’s policies

Finally, FD rates are linked to RBI’s monetary policies such as the repo rate, which is the rate at which the RBI lends finances. Recently, it was cut by 25 basis points and is currently at 6%. When rates are cut, borrowing becomes easier, and hence financial institutions may lower FD rates.

The recent repo rate cut is a good reason to invest in an FD right away, before interest rates drop. You can lock in a high interest rate by applying for an FD online, in a matter of minutes.

This article does not necessarily reflect the opinions of the editors or management of EconoTimes.

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