In a Recurring Deposit (RD), individuals deposit a fixed amount every month in return for periodic interest payouts. It is a type of investment that is popular among investors who prefer to make systematic savings without locking up a huge sum of amount at once. Before investing, the investors can calculate their returns. Based on their monthly payments, the tenure of the RD, and the applicable interest rates, investors can calculate their returns using an RD calculator. In the article, we are going to see how you can leverage mathematics and easily calculate RD returns.
Understanding Recurring Deposit and an RD Calculator
Recurring Deposit is a savings scheme offered by banks and financial institutions to help individuals regularly save a fixed amount each month. The tenure of an RD can range anywhere between six months to ten years with interest rates varying between 3%-8%.
But before you start your savings, you can calculate the exact amount you would have at the end of the RD’s tenure. This is where an RD calculator helps. By taking into account your monthly contribution, current interest rate, and the tenure of the RD, the calculator gives you an accurate projection of the amount you would be able to save. This would give you an edge during your financial planning.
Benefits of Using an RD Calculator
There are many benefits of using an RD calculator. Some of them are listed below.
- Time-Saving
The biggest benefit of using an RD calculator is that it enables you to perform complex interest calculations instantly.
- Freely Available
As most RD calculators are freely available online, investors can easily experiment with different amounts, tenures and interest rates.
- Comparison Tool
You can use an RD calculator to compare different recurring deposit schemes and choose the ones that fit your financial goals.
Calculating RD Returns Using an RD Calculator
You can calculate the returns of your recurring deposit by entering the below details in an RD calculator.
- Monthly Deposit Amount (R): It is the amount you would invest into your RD account every month.
- Interest Rate (i): Now you input the rate of interest that is being offered by the bank or the financial institution.
- Tenure (n): Specify the total duration for which you’ll be making regular deposits. The tenure may range from six months to ten years.
Once you input all the required details, the calculator will provide you with the total maturity value (including both, the principal deposit and the interest earned).
Formula-based Calculation of RD Returns
The formula based on which the RD calculator calculates the returns is as follows.
M = R * [(1+i)^n -1]/(1-(1+i)^(-1/3) )]
In this formula, M is the maturity value, R is the monthly deposit, i is the interest rate/ 400(to account for quarterly), and n is the number of quarters in the tenure.
The RD calculator simplifies these calculations for you. RD interest is compounded quarterly. This increases your total returns compared to simple interest, as the interest is added to the principal more frequently. This leads to higher earnings over time.
Example of RD Calculation
Assuming that you wish to deposit Rs. 5000 for a total period of 2 years at the interest rate of 6.5% per annum. In this case,
- Monthly Deposit (R): Rs. 5000
- Interest Rate (i): 6.5% per annum. Therefore i = 6.5/400
- Tenure: 2 years equals 8 quarters.
When we put all these values in an RD calculator, it instantly gives out the maturity value to be Rs. 1,28,425.3 (principal amount = Rs. 1,20,000, interest payment = Rs. 8425.3). Similarly, you can input the values you want in an RD calculator app to find out the maturity value of your investment.
Factors Affecting Your RD Returns
As seen in the above example, multiple inputs are needed to calculate the RD returns. Similarly, various factors affect your RD returns. Some of them are listed below.
- Interest Rate
Interest rates offered by banks and other financial institutions differ. Before starting your RD journey, it is important to compare RD rates to maximise your earnings.
- Tenure and Monthly Deposit Amount
The more the tenure, the more time will your investment have to experience the power of compounding. Similarly, the higher your monthly deposit, the more money you will receive at the RD’s maturity.
- Compounding Frequency
In India, RD interest is usually compounded quarterly. This works in your favour as it helps you boost the overall returns.
Conclusion
An RD calculator can prove to be a useful tool while investing in RDs. This is because it not only helps you to plan your savings effectively but also provides a clear picture of the returns you can expect based on your investments. By using an RD calculator, you can also compare different RD schemes and choose the ones that best suit your financial goals.
