Which Fixed Deposit is Best ?
Introduction
Generally, While creating Fixed Deposits (FD’s) in any bank like SBI, HDFC, Axis Bank or any other bank, the depositor will have a choice to select, when to collect the Interest part on the deposit. The depositor can make a deposit either on Monthly, Quarterly or at the time of Maturity period.
But, Which option will make make some decent money..!!
To know this, Let’s Move on further my dear friend.
In case if you select the “Monthly Payout” option at the time of creating an FD, then, you will earn interest on a Monthly basis. Here, the Interest will be calculated on the Principal amount you have been deposited. Finally, Banks will credit your Interest portion to your Savings Bank account.
In case if you select the “Quarterly Pay-out” option, your earned interest portion on your fixed deposit will be credited to your Savings Bank account on a Quarterly basis, i.e. Once in every 3 months.
However, If you select “Maturity” option, then, the interest portion will be paid by the end of the period for which you have been selected. Simply, your Principal amount along with your Interest portion will be credited to your Savings Bank account only the end of the Maturity period.
But now, We are going to discuss about “Reinvestment of Interest”
What is Reinvestment option in FD?
If we select this option at the time of creating FD, when the interest will be credited?
To whom this Reinvestment option is helpful..?
Let’s clear all these doubts and finally we will conclude, Which Fixed Deposit is Best and I will also share preference order to earn more money with Fixed deposits (FD’s).
Watch this article as a Video (Telugu)
Maximizing Returns on Your Lump Sum
If you have a Lump sum money in your Bank account of either Rs.10,000, Rs.50,000, Rs.1,00,000/- or even more. Then, You will get almost nominal interest if you kept it in your Savings Bank account usually around 3-4% p.a.
No person will really enjoy these interest rates on their Lumpsum amounts.
Of course, It’s a human psychology to make money from Savings instead of keeping it almost idle.
As we have multiple investing options, however, if you want to choose Fixed Deposit as one of your investing option, then, you should definitely consider about “Reinvestment of Interest”.
1. What is Reinvestment of Interest?
Depositors who doesn’t want to get Monthly or Quarterly interest to their Bank accounts, they can select the option of “Reinvestment”
Under this Reinvestment option, the Interest portion of FD will not be credited to your bank account on monthly or quarterly basis. Simply, Banks will calculate your interest on a Quarterly basis and will add this interest portion to your Fixed Deposit balance amount every quarter.
This process of Reinvesting the Interest portion to the Principal amount will be done till the maturity time.
Due to this, the depositor will get a chance to earn more money in the form of interest by the end of Maturity time.
2. How much Interest can I earn under Reinvestment?
Let’s see with a small example
Also, We will check each and every option while creating an FD and finally we will practically conclude whether the Reinvestment option is beneficial or not.
Monthly Pay-out option
For Example, you have deposited Rs.1 Lakh in a Fixed Deposit for a 2 year term that gives you 7% Rate of Interest. Assume, If you have selected “Monthly pay-out” option, then, let’s see how much interest you can earn at the end of 2 years..!!
Let’ Summarize it.
| Particulars | Values |
|---|---|
| Deposited Amount | Rs.1,00,000/- |
| Period of Deposit | 2 Years |
| Rate of Interest | 7% p.a. |
| Type of Pay-out option | Monthly Pay-out |
For the Deposited amount of Rs.1,00,000/-, If you select the “Monthly pay-out” option, the interest amount you can earn for the 2 years period comes to Rs.13,914/-.
Quarterly Pay-out option
Suppose, you have deposited Rs.1 Lakh in a Fixed Deposit that gives you 7% Rate of Interest for a 2 year term. Assume, If you have selected “Quarterly pay-out” option, let’s see how much interest you can earn at the end of 2 years..!!
Let’ Summarize it.
| Particulars | Values |
|---|---|
| Deposited Amount | Rs.1,00,000/- |
| Period of Deposit | 2 Years |
| Rate of Interest | 7% p.a. |
| Type of Pay-out option | Quarterly Pay-out |
If you observe this example with the earlier example, I changed the pay-out option only, rest of the values are remains unchanged.
Now, let’s see how much interest you can earn under “Quarterly Pay-out”?
If you select the “Quarterly pay-out” option, for the Deposited amount of Rs.1,00,000/-, the interest amount you can earn in 2 years period comes to Rs.13,991/-
Simply, if you compare Quarterly pay-out with Monthly pay-out option, then you will earn more interest under the Quarterly pay-out option only.
In this case, you will get Rs.77/- extra income under Quarterly pay-out option.
Of course the interest amount is not too much, but if you compare it with the monthly pay-out, the quarterly pay-out will make you earn some extra income for sure.
Reinvestment
However, if you have deposited the same Rs.1 Lakh in a Fixed Deposit that gives you 7% Rate of Interest for a 2 year term. Assume, you have selected “Reinvestment” option, let’s see how much interest you can earn at the end of 2 years..!!
Let’ Summarize it.
| Particulars | Values |
|---|---|
| Deposited Amount | Rs.1,00,000/- |
| Period of Deposit | 2 Years |
| Rate of Interest | 7% p.a. |
| Type of Pay-out option | Reinvestment |
For the Deposited amount of Rs.1,00,000/- If you select the “Reinvestment” option, the interest amount you can earn in 2 years period comes to Rs.14,789/-.
Simply, if you compare Monthly, Quarterly pay-out options with Reinvestment, then the depositor will earn more interest under the Reinvestment option only.
Therefore, in this case of Reinvestment option, it is to be noted that you can earn Rs.875/- extra income in the form of interest for the same values.
Also Read: TDR vs STDR: Which option is better
3. Which option is better for Whom?
Let me tell you the sequence of order, you can use while creating an FD.
After considering all the above 3 options, While creating a Fixed Deposit, irrespective of the period of the deposit, it is advisable to opt for “Reinvestment option”
1. Reinvestment option
Because, this option will give you more money in the form of interest.
This reinvestment option is helpful for those who doesn’t need to get interest portion either on Monthly or Quarterly basis to their bank account.
If you want to earn more money in the form of interest through FD, undoubtedly this is the best method.
2. Quarterly pay-out option
If you think the Reinvestment option will not suit for you, then, consider choosing “Quarterly pay-out option” as a 2nd option.
This pay-out option gives you a chance to earn a little more extra money than the monthly pay-out option. But under this option to get the maximum benefit in the form interest, you need to hold your deposit for a long term period.
3. Monthly pay-out option
If none of the above is not suited, What should I do..!
I need to pay my interest in bank account on every month,
It doesn’t matter how much interest I get, I expect some monthly income.
In case if you are a kind of person, then, select “Monthly pay-out” option as a final option.
If you have selected the Reinvestment option, then, even if you get 7% Rate of Interest, you have a great chance to earn more returns from the FD itself. Otherwise, Even though if you get same 7% rate of interest in Monthly or Quarterly pay-out, you will end up in loosing money.
Also Read: How to open Fixed Deposit in SBI
4. What is the Difference between Regular FD and Reinvestment?
In a regular FD, the Fixed deposit balance amount is always constant.
For example, if you deposit Rs.1 Lakh rupees, then, the interest will be calculated only on that Rs.1 Lakh rupees only.
Coming to Reinvestment option, Fixed deposit balance amount increases every quarter. So that you always have more balance in Fixed deposit account which results you to earn more interest.
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