What Is a Fixed Deposit?

A fixed deposit is a savings account that fixes your money at a set interest rate for a set length of time. It is a low-risk vehicle for short to medium-term savings – usually ranging from about six months to five years.

Our fixed deposit (FD) calculator is a handy online tool that helps users calculate the maturity amount of their fixed deposits by simply inputting the principal amount, interest rate, and duration.

The FD calculator simplifies the process of determining the expected returns. You can find the calculator by scrolling down in this article.

Fixed deposits are available from some banks and other financial institutions. Their main advantages are that they usually offer a higher interest rate than other savings accounts and the interest is predictable and guaranteed.

Fun Fact: In some countries a fixed deposit is known as a term deposit, certificate of deposit (CD), time deposit, or savings bond.

Key Takeaways: Fixed Deposit Calculator

  1. Guaranteed Returns: Fixed deposits offer guaranteed returns, making them a safe investment option compared to stocks or cryptocurrencies.
  2. Interest Rate Factors: The interest rate for fixed deposits is influenced by the central bank rates, deposit amounts, term lengths, and payout frequencies.
  3. Tax Implications: While fixed deposits ensure secure and predictable returns, the interest earned is taxable, which might affect the overall gain for some investors.
  4. Accessibility: Fixed deposits lock in your money for a set period, which can be a disadvantage in case of financial emergencies where immediate cash is needed.
  5. Alternative Options: For those looking for higher returns, other investment options like high-yield savings accounts, mutual funds, or even crypto savings accounts might be more suitable.

Pro Tip: Some banks offer higher interest rates on the renewal of your fixed deposit, which can be a smart way to increase your returns over time.

How Does a Fixed Deposit Work?

Many financial institutions offer a selection of fixed deposit accounts with predetermined interest rates and periods.

There will be a minimum deposit requirement. Once you have selected a period and deposited the capital amount, the interest rate is locked in until the end of the period.

Most fixed deposits do not allow withdrawals or additional deposits until the date the deposit matures. If withdrawals are allowed, they may be subject to penalties or an enforced delay.

Interest may be paid out monthly, annually, or on the date the deposit matures, depending on the terms of the fixed deposit.

What Impacts The Interest Rate?

The interest rate available from your bank will be influenced by the interest rate set by the Federal Reserve, or the central bank in your country, as well as the bank’s needs and the demand for credit.

The interest rates available for a specific fixed deposit account may also be impacted by the following.

Deposit Amount

The more you save, the more money the bank can earn by lending that money to someone else. That’s why interest rates are typically higher for larger deposits, as illustrated in this example from Lloyds Bank.

Length of Term

As you can see from this example from Axis Bank in India, some banks offer higher interest rates if you are willing to lock away your money for longer.

However, that is not always the case. HSBC, for example, offers a higher interest rate for a one-year fixed deposit than a two-year fixed deposit.

Regularity of Interest Payouts

Monthly interest payments allow you to earn more regularly but annual payouts tend to offer a better rate because of compounding. However, that is not always the case.

As you can see from this information from the Co-operative Bank, if your interest is paid monthly rather annually you may earn a higher AER interest rate.

If you take out a fixed deposit account with the Post Office in the UK, you earn at the same AER whether you receive payouts monthly or annually.

Fixed Deposit (FD) Calculator

Use our Fixed Deposit calculator to forecast your investment’s growth and make informed financial decisions with ease.

FD Calculator

The Formula to Determine FD Maturity Amount

To fully understand the potential returns from a fixed deposit, it’s important to know how to calculate the maturity amount.

This calculation can help you predict how much your investment will be worth at the end of its term. There are two main types of calculations depending on the interest calculation method used: simple interest and compound interest.

Simple Interest Formula:

The formula for calculating the maturity amount with simple interest is straightforward:

M=P+(P×r×t/100)

Where:

  • is the maturity amount,
  • is the principal amount (the initial sum deposited),
  • is the annual interest rate,
  • is the term of the deposit in years.

Example: If you deposit $10,000 at an interest rate of 5% per annum for 3 years, the calculation would be:

M=10,000+(10,000×5×3/100)=10,000+1,500=$11,500

Compound Interest Formula:

For compound interest, the formula is a bit more complex as it accounts for the interest being added to the principal at each compounding period and then earning further interest:

M=P×(1+i/100)^t

Where:

  • is the maturity amount,
  • is the principal amount,
  • is the interest rate per compounding period,
  • is the number of compounding periods.

Example: If the same $10,000 is compounded annually at a rate of 5% for 3 years, the calculation would be:

M=10,000×(1+5/100)^3=10,000×1.157625=$11,576.25

Benefits of a Fixed Deposit

A fixed deposit is a fitting solution for many savers for the following reasons.

  1. Your capital amount is safe. Unlike many investments, you are guaranteed to get your deposit back in full.
  2. Your returns are guaranteed. Again, unlike most investments, you know in advance exactly how much interest you will earn.
  3. You are protected if interest rates drop. If economic conditions change and interest rates fall, your investment is not impacted.
  4. They offer better rates than alternatives. Fixed deposits tend to offer better interest rates than other savings accounts, including notice accounts – which require you to give the bank notice in advance of any withdrawals in exchange for better rates.
  5. You can’t eat into your savings. Fixed deposit accounts do not allow withdrawals until the end of the period which means you won’t be tempted to spend your savings early.
  6. Fixed deposits are easy to manage. You simply choose a plan, deposit your money, and wait to receive your returns.
  7. You have a choice of currencies. Some financial institutions allow you to take out a fixed deposit account in one of several currencies.

Disadvantages of a Fixed Deposit

There are some occasions when a fixed deposit is not the right tool. Here’s why.

  1. Your money is locked away. If you need to access cash quickly for an emergency, your deposit it not accessible because withdrawals are restricted.
  2. You can’t add to your capital amount. If you want to put away a little bit of your income every month, a fixed deposit is not the right solution because you can only make one bulk deposit.
  3. You won’t benefit from interest rate rises. The interest rate for your fixed deposit is locked in, no matter what, whereas other savings accounts are linked to changing interest rates.
  4. You will owe tax at the end of the term. Returns from a fixed deposit are taxable. There may be more tax-efficient ways to invest your money.
  5. The minimum deposit can be high. If you want to save a small amount, this may not be the right vehicle.
  6. Low risk means low reward. If you take a risk and invest in the stock market, cryptocurrencies, or a business, you might lose all your money but there is a possibility of higher returns.

What Is Annual Equivalent Rate or AER?

The best way to compare different fixed deposit accounts is to look at the AER or Annual Equivalent Rate. This is a percentage that indicates what you could earn from an account over a year.

Unlike the gross interest rate, AER accounts for compound interest i.e. interest earned not just on your lump sum but on the interest you’ve already accumulated. This makes it a more realistic measure than gross interest. However, AER does not account for any fees or bank charges.

When comparing fixed deposit accounts, you should also look at minimum deposit requirements, the periods available, withdrawal rules, and the reputation of the financial institution.

When Are Fixed Deposits Generally Best?

A fixed deposit might be a good choice if:

  • You have a lump sum that you’d like to set aside.
  • You have a short or medium-term savings goal that you want to know you can reach e.g. buying a car or a vehicle for your business.
  • You won’t need your lump sum for emergencies before the account matures.
  • You are a risk-averse investor but want better rates than a regular savings account.
  • Interest rates are high.

Alternatives to a Fixed Deposit

There are lots of different ways to save or invest money. If a fixed deposit isn’t quite right for you, here are some other ideas.

High-Yield Savings Accounts

Some banks (especially online-only banks) offer savings accounts that earn higher yields than a normal savings account. For example, Barclays advertises an account with an average annual percentage yield (APY) of 4.25% at the time of writing.

These accounts usually offer a variable rate which means high returns are not guaranteed. You will lose out if interest rates fall and benefit if interest rates rise. However, as with a fixed deposit account, your original deposit will be safe.

High-yield accounts are also generally more flexible than fixed-deposit accounts and will allow withdrawals.

Mutual Funds

A mutual fund is an investment that pools the money of multiple investors and invests it in a diversified portfolio of stocks, bonds, equities, and other assets.

The portfolio is managed by a professional fund manager who aims to maximize the yield and a fee is charged for this service. Investing as a group gives investors access to portfolios that are difficult to access as an individual.

There are many types of mutual funds with different yields and risk levels that invest in different assets. Money market funds are a type of mutual fund that could be an alternative to a fixed deposit.

Money Market Mutual Funds

A money market fund is the lowest risk category of mutual fund with the lowest returns and is suited to short-term investing. Unlike a fixed deposit, a money market fund does not offer guaranteed returns. The value of your investment will depend on the performance of the fund manager and the market, so look the past performance of the fund manager and market trends before investing.

According to the Wall Street Journal, the median money market fund returned 4.2% over the past year, while Time notes that some certificates of deposit pay as high as 5%.

Crypto Savings Accounts

A crypto savings account works like a normal savings account except that, instead of storing cash, you store cryptocurrency, such as Bitcoin, Ethereum, or Tether. Crypto savings accounts are available from providers like Coinbase and Binance.

There are even some fixed deposit crypto accounts that lock funds for a set period and offer higher yields.

The benefits of a crypto savings account include:

  • High yields, in many cases.
  • Reduced reliance on traditional financial assets, which may be advantageous during periods of market decline.
  • Additional earning opportunities including staking and yield farming, which are unique to crypto.

Downsides include:

  • The price volatility of cryptocurrencies which means you could lose all your savings.
  • Lack of FDIC insurance which means you are not covered if the provider fails.
  • The unpredictable regulatory environment which could change the rules around how your savings account is managed.

There is a much debate about whether cryptocurrencies are a good investments but you should do your own extensive research either way.

Bottom Line

There are so many options available to individuals and businesses when it comes to saving or investing money.

It can be difficult to know which product to choose.

If you have a lump sum that you’d like to set aside for the short to medium-term and a low risk appetite, a fixed deposit is a good choice, especially when interest rates are high.

However, there are alternatives available that promise a higher yield. Consider your investment goals, use the fixed deposit calculator and do your homework before you decide.