Fixed Income Instruments form the core of portfolios across income groups. Maturity values of Fixed Deposits, recurring deposits, and PPF account can be pre-determined based on the rate of interest, which is fixed. Once a deposit is fixed at the current rate, no changes in interest rates can affect the returns. Investors always track the change in interest rates with banks to find an opportune time to invest.
Differences in various Instruments
However, to take maximum benefit, one must be aware of the way the interest rates are calculated on each of these instruments. Fixed deposit and recurring deposit rates are determined by the banks based on their own cost of funds (called the MCLR or Marginal Cost of Funds based Lending Returns). FD Interest rates in 2019 are expected to fall from their current levels and have been revised downwards almost five times by large banks.
These changes follow the rates announced by the Reserve Bank of India. Banks calculate interest on these deposits on a quarterly basis.
PPF or Public Provident Fund accounts are part of the Small Saving Schemes of the government, which announces its applicable interest rate each quarter. Currently, the October – December 2019 quarter rate has been announced at 7.9% continuing the trend from last quarter. The PPF interest is determined on a monthly basis but credited only on March 31 each year.
To calculate the final amounts, you can also utilise freely available FD Maturity calculator for bank deposits as well as PPF.
Calculation of maturity value
Calculation of fixed deposit and recurring deposit maturity value is done on the basis of compound interest calculation where the interest is calculated on interest and principal combined. This gives rise to higher interest than a simple interest calculation would. Thus, a simple interest calculation on Rs. 25,000 for 5 years invested at the rate of 8.37%, you will get a maturity amount of Rs 35,437.5. Whereas, if you were to use a compound interest formula as below, you would earn a little bit more. The compounding frequency will bring an additional difference in interest. If the amount is compounded quarterly like in banks, the maturity amount will be Rs 37,791.
M = P (1 + r/4/100) ^ (4*n) and M = P (1 + r/25)4n
M = Maturity Amount
P = Principal/Deposit Amount
n = Compounded Interest Frequency
PPF Maturity Amount
PPF requires a minimum investment of Rs. 500 and a maximum of Rs. 1,50,000 in a year. You can either make a monthly investment or a lump sum investment. If you had made a contribution of Rs. 25,000 in the beginning of the financial year, i.e., before 5th March, the interest will be calculated monthly and you would earn an interest of Rs. 173.95 each month, which would be Rs. 2087.5 for a financial year.
This is a simple interest calculation which is calculated separately for each month on the balance before every 5th. Thus, it is advised to deposit your monthly contribution by this date otherwise you will forgo the interest calculation on it for the month.
Look beyond these investments
However, banks are now offering interest rates only between 4.5% to 7.2%. This is a very small range of interest to be earned. While PPF is still offering a decent return, it fails to work on compounding. Company fixed deposits which are vetted for credibility and guarantee by leading credit agencies are the best possible option for investors in this low interest scenario. Bajaj Finance FD has been a front-runner in fixed deposits with attractive rates and features. With an interest rate from 8.35% for new customers to an additional 0.35% for senior citizens for five years investments, the return on investment is worth consideration.
Gaurav khanna is an experienced tech enthusiast, digital marketer and blogger who is well known for his ability to predict market trends. Check out his blog at HighlightStory