Recurring Deposits Calculation
Most of us very often
open a recurring deposit with bank. But one thing I have observed that the
calculation on recurring deposit in the mind of most account holder are not
clear. There are many query about the interest calculation method of recurring
deposit account. The people often in confusion why is the difference between
their calculation and bank calculation. That difference is due to the fact that
while they were compounding interest monthly, banks usually compound interest
quarterly and that’s why they were getting a different answer.
There are many recurring deposit calculators also available
online but there were hardly any explanations So, after searching a lot of
explanation about the interest calculation of recurring deposit I have got very
simple and good explanation about the RD interest calculation with example.
When you create a RD
for Rs. 20,000 for 2 years, what you’re doing is depositing Rs. 20,000 with the
bank every month for 24 months, and the bank pays you interest on Rs. 20,000
for 2 years compounding it quarterly, then for the next Rs. 20,000 it pays you
interest for 23 months, and so on and so forth.
Banks usually compound
interest quarterly, so the first thing is to look at the formula for compound
interest. That formula is as follows:
A formula for
calculating annual compound interest is
Where,
A = final amount
P = principal amount
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
In your recurring
deposit, you use this formula to calculate the final amount with each
installment, and at the end of the installments, you add them all up to get the
final amount.
Think of RD
Installments and Series of Principal Payments
Let’s take a simple
example to understand this – suppose you start a recurring deposit for Rs.
47,000 per month for 2 years at 8.25% compounded quarterly. If you were to see
this number as a standalone fixed deposit that you set up every month for 24
months, you could come up with a table like here. Before you get to the table,
here is a brief explanation on the columns.
Month: First column is simply the Month.
Principal (P): Second column is P or principal
investment which is going to be the same for 24 months,
Rate of Interest (r): r is going to 8.25% divided by
100.
1+r/n: In our case, n is 4 since the
interest is compounded quarterly, and 1+r/n is rate divided by compounding
periods.
Months Remaining: This is simply how far away from 2
years you are because that’s how much time your money will grow for.
Months expressed in
year: I’ve created a column
for Months expressed in a year since that makes it easy to do the calculation
in Excel.
nt: 4 multiplied by how many months are
remaining as expressed in year.
(1+r/n)^nt: Rate of interest raised by the
compounding factor.
Amount (A): Finally, this is the amount you if
you plug in the numbers in a row in the compound interest formula.
So, Rs. 47000
compounded quarterly for 2 years at 8.25% will yield Rs. 55,338.51 after two
years. The last row contains the grand total which is what the RD will yield at
the end of the time period.
|
Month
|
P
|
r
|
1+r/n
|
Months remaining
|
Months expressed in
year ( No. of Months/ 12)
|
nt
|
(1+r/n)^nt
|
A
|
|
1
|
47000
|
0.0825
|
1.020625
|
24
|
2
|
8.00
|
1.18
|
55338.51
|
|
2
|
47000
|
0.0825
|
1.020625
|
23
|
1.916666667
|
7.67
|
1.17
|
54963.21
|
|
3
|
47000
|
0.0825
|
1.020625
|
22
|
1.833333333
|
7.33
|
1.16
|
54590.45
|
|
4
|
47000
|
0.0825
|
1.020625
|
21
|
1.75
|
7.00
|
1.15
|
54220.22
|
|
5
|
47000
|
0.0825
|
1.020625
|
20
|
1.666666667
|
6.67
|
1.15
|
53852.50
|
|
6
|
47000
|
0.0825
|
1.020625
|
19
|
1.583333333
|
6.33
|
1.14
|
53487.27
|
|
7
|
47000
|
0.0825
|
1.020625
|
18
|
1.5
|
6.00
|
1.13
|
53124.53
|
|
8
|
47000
|
0.0825
|
1.020625
|
17
|
1.416666667
|
5.67
|
1.12
|
52764.24
|
|
9
|
47000
|
0.0825
|
1.020625
|
16
|
1.333333333
|
5.33
|
1.12
|
52406.39
|
|
10
|
47000
|
0.0825
|
1.020625
|
15
|
1.25
|
5.00
|
1.11
|
52050.97
|
|
11
|
47000
|
0.0825
|
1.020625
|
14
|
1.166666667
|
4.67
|
1.10
|
51697.97
|
|
12
|
47000
|
0.0825
|
1.020625
|
13
|
1.083333333
|
4.33
|
1.09
|
51347.35
|
|
13
|
47000
|
0.0825
|
1.020625
|
12
|
1
|
4.00
|
1.09
|
50999.12
|
|
14
|
47000
|
0.0825
|
1.020625
|
11
|
0.916666667
|
3.67
|
1.08
|
50653.24
|
|
15
|
47000
|
0.0825
|
1.020625
|
10
|
0.833333333
|
3.33
|
1.07
|
50309.72
|
|
16
|
47000
|
0.0825
|
1.020625
|
9
|
0.75
|
3.00
|
1.06
|
49968.52
|
|
17
|
47000
|
0.0825
|
1.020625
|
8
|
0.666666667
|
2.67
|
1.06
|
49629.63
|
|
18
|
47000
|
0.0825
|
1.020625
|
7
|
0.583333333
|
2.33
|
1.05
|
49293.05
|
|
19
|
47000
|
0.0825
|
1.020625
|
6
|
0.5
|
2.00
|
1.04
|
48958.74
|
|
20
|
47000
|
0.0825
|
1.020625
|
5
|
0.416666667
|
1.67
|
1.03
|
48626.71
|
|
21
|
47000
|
0.0825
|
1.020625
|
4
|
0.333333333
|
1.33
|
1.03
|
48296.92
|
|
22
|
47000
|
0.0825
|
1.020625
|
3
|
0.25
|
1.00
|
1.02
|
47969.38
|
|
23
|
47000
|
0.0825
|
1.020625
|
2
|
0.166666667
|
0.67
|
1.01
|
47644.05
|
|
24
|
47000
|
0.0825
|
1.020625
|
1
|
0.083333333
|
0.33
|
1.01
|
47320.93
|
|
Final Amount
|
12,29,514
|
If you have any
questions or have links to better ways to explain this then please leave a
comment!
Regards,
Arvind Trivedi
Certified Financial Planner
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