Difference Between Yield and Interest Rate on FDs

Posted in Investment By Friyana Munshi - Jan 24,2023
view icon 224 Views like icon 0

We are always on the constant lookout for the perfect savings option which will gradually grow our funds and assist our financial goals. You have researched and analysed hundreds of options to find the fixed deposit that perfectly aligns with your monetary goals. These include several options shown in advertisements with attractive yield rates. Wait, hold on a second! We hope you did not interpret yield rates and interest rates synonymously!

The two terms might seem the same, but they mean two separate things. It is essential to understand the difference between the two before opting for a savings option. Before depositing your money, you must ascertain the returns you are liable to get on such savings plans. Do not be influenced by creative and appealing advertisements. First, understand what yield and interest rates are in detail so that you can take the right decision!

Interest rates

Interest on an FD is the rate at which returns are offered on your deposited amount. Returns are offered based on compound interest and is not affected by any other factors. An interest rate determines the total returns you are liable to get at the end of the fixed tenor.

Here’s an example to help you understand this better. Let’s assume that you deposit ₹2 Lakhs for a period of 2 years at an interest of 7%. In this case, using the compounding principal, the interest you can get is about ₹29,776. Hence your total returns will be ₹2,29,776. Suppose this rate was 6% and not 7%, then your estimate interest earnings would be ₹25,299 with the total amount going down to ₹2,25,299.

Yield rates

In simple words, yield refers to the total amount you receive at the end of your tenor. The principal amount you deposit + the interest you earn = your total yield. When calculated, it considers multiple factors, like tax benefits, along with the interest earned. Dividing the total returns earned with the tenor will get you the annualised effective yield. A basic formula is used to calculate the yield which is APY = (1 + I/N) N – 1. Here, ‘N’ stands for the number of compound periods, and ‘I’ represents the rate of interest.

Your FD yield depends on the interest rate at which you locked your deposit. Hence, just like the interest earnings, the yield also increases with a prolonged tenor. However, the yield is generally higher than the interest as the calculation of an FD rate and a yield varies.

Difference between yield and interest rate

Here are a few factors to consider to better understand how FD interest and yield rates are different:

  • Your interest rate allows you to chart the growth of your investment and not the earnings. On the other hand, yield is the estimate of your returns, including the interest earnings and the principal invested over time to garner higher earnings. Hence helping you get an estimate on the total amount you are liable to receive on maturity.
  • The yield rate is generally higher than the interest rate and vice versa.
  • Your FD rates remain constant as fixed by the provider. However, your yield varies, usually rising as the tenor increases.
  • You can calculate the interest on varying terms, i.e., yearly, half-yearly, quarterly, and even monthly. A yield is projected annually and is hence calculated on a yearly basis.

What should one look at when opening an FD?

After understanding the difference between the two, surely you are questioning which of the two to consider when opening a new FD. You must ensure  do not fall for pre-tax yield rates when opening an FD. As these yield rates are used to entice the customers into getting a new FD. What you can do is compare the interest earnings and yields separately and plan out your savings using an FD calculator which is quite easily available online. This will help you  estimate the value on the actual returns you are liable to get on maturity under a certain fixed deposit.

It is essential that while researching you do not compare the yield of one FD plan with another deposit’s interest rate. Doing so can result in an inaccurate comparison, leading you to make an ill-informed decision. This is because, even if the returns are the same, the calculations for both will differ.

You should look at the annualised yield before opting for a fixed deposit. This is essential, especially if the objective of this new FD you take is to balance the risk factor in your portfolio. By forecasting your total earnings, you can further map your financial decisions, strengthening your financial future.

 

Making an informed decision is necessary, even more so when your money is on the line. Ensure that you understand such concepts well prior to making any new investments or savings. With this new-found knowledge on yield and interest rates, get the FD which is not just enticing but also garners great returns! Looking for great offers on FDs? Go on Bajaj Markets! With numerous providers and a large host of offers, find the fixed deposit that appeals the most to you and your monetary plan. Save now with interest rates as high as 7.95% !

Home
active_tab
Loan Offer
active_tab
Download App
active_tab
CIBIL Score
active_tab