October 9, 2012

How to calculate interest on Recurring Deposit (Compound Interest)

Recurring deposit is a very popular investment scheme and almost everyone has done at least one RD account. Many people don't know the actual calculation of the interest they will get after maturity. They are simply happy with what agents have explained them.
But you should know the facts or information where your money is invested and how much you will get in future. Just to make yourself feel good & relax.
There are 2 types of interest rates applied on savings. Normal interest and compound interest rate. For recurring deposit the interest rate is calculated based on compound interest rate formula.
The annual compound interest formula is
A = P \left(1 + \frac{r}{n}\right)^{nt}
Where,
  • A = final amount
  • P = principal amount (initial investment)
  • r = annual nominal interest rate (as a decimal, not in percentage)
  • n = number of times the interest is compounded per year
  • t = number of years
Let's say you have a recurring deposit account with monthly investment of Rs 2000/- . As per current interest rate 8.40% with a maturity of 5 years.
Now in case of compound interest (e.g. compounded quarterly), the amount deposited for 1st month with interest accumulated for 60 months (here tenure 5 years) on that will consider together as principle for next month. But from net month on wards the tenure will reduce by 1 month.  So you will get a higher return than a normal direct interest rate investment.
I found a very good example on this in detailed manner in onemint.com blog. An elaborate month wise data is provided there. You can check with your amount deposited every month and calculate yourself.