Financial literacy and more
Simple interest is a way of calculating the interest on your investments like a fixed deposit.
This is an easy way to calculate the interest on a fixed base..
The base amount remains the same in this calculation of interest.
For example an amount of Rs 5,000 earning 10 per cent interest will generate Rs 500 in simple interest every year.
This figure will remain the same year after year till the end of the calculation period.
The benefit of making a cumulative fixed deposit is that it will earn a higher return for the investor.
Consider an example of Rs 1 lakh invested in a fixed deposit at 8 per cent in two cases for 3 years. The first involves the interest to be paid out and the other for the interest to accumulate.
In case of the payout the interest earned over the 3 year period is Rs 24,000.
For the cumulative interest deposit the interest earned at the end of the 3 years is Rs 25,971.
By not taking out the interest the investor has more in hand at the end of the 3 years.
Under simple interest the investor earns interest on a fixed base.
Year after year the base amount does not change.
When this is the case there is no point in keeping the interest earned with the lending institution.
The investor should take out the interest that they have earned.
This method of interest calculation should be used only when a payout of the interest earned is needed
The calculation of interest on the fixed deposits will vary according to the choice made by the investor.
A fixed deposit that pays out interest will have a simple interest calculation. For example a 8 per cent deposit for Rs 1 lakh will have an interest of Rs 8,000 a year.
In case the payout is less than a year than the amount is paid proportionately so in the example above a half yearly payout will lead to a payment of Rs 4,000 every 6 months.
A cumulative fixed deposit will calculate interest every year which keeps getting added to the initial amount.
In these deposits the interest earned every year will rise as the base rises