Fixed Deposit's Quarterly Compounding vs Annual Compounding

Investors who are wary of risk have had a difficult time as interest rates have fallen. Once offering returns of over 8%, fixed deposits now only provide returns of 4-5 % before taxes. Increasing your guaranteed returns can be done in many ways. In this post, we'll examine how often interest is compounded and how it affects your interest income.

Compounding frequency

Bank FDs normally grow at a rate of one quarter every year. What exactly does this mean? It implies that at the conclusion of each quarter, the deposit is reinvested with the interest produced from the previous quarter's deposits. As a result, interest will be computed not only on the principle, but also on the interest that has already been generated in the upcoming quarter.

To what extent does this help the depositor?

The more often a deposit is compounded each year, the more advantageous it is for the depositor. Let's have a look at an example of this. We have a 6-percent FD with a compound yearly interest rate of Rs. 1 lakh. The FD will pay out Rs. 6000 in interest at the end of the year. One more FD of Rs. 1 lakh is also available at 6%, although this one compounds quarterly instead of monthly. An annual interest payment of Rs. 6136 would be made on this FD. Compounding has a greater impact on returns when invested over a longer period of time and with a larger sum. A five-year return of Rs. 133,822 for the first FD and Rs. 134,685 for the second is an example.

Reduced rates can be used to cover greater interest costs

It's possible. Take, for instance, two five-year FDs each at Rs. 1 lakh. 6% annual compounding is offered by the first, which will pay Rs 133,822 lakh at maturity. The second yields 5.87 percent every quarter. It will pay out Rs. 133,825 at maturity, which is nearly the same as the first FD offering a 13-basis-point increase in interest. Similar to the 6.15 percent FD compounding annually, a 6% FD with quarterly compounding will yield about the same returns.

What financial products are available from the banks?

Quarterly compounding is the most common method of interest accrual for long-term fixed-rate deposits (FDs). While this isn't always the case, certain banks may provide compounding on a monthly, semiannual, or annual basis. You, as a depositor, must verify the terms of the deposit. If you rely on fixed-income instruments like FDs for your financial well-being, these minor details matter. Interest revenue can be increased by increasing the frequency at which interest is compounded.