The Impact of Compounding on Recurring Deposit Returns
November 05, 2024
Recurring Deposits (RDs) are popular savings instruments that allow you to save money over time via periodic (generally monthly) deposits/investments. Although RDs offer a fixed interest rate throughout the tenure, the interest credited and the returns you earn can vary with each credit due to compounding and the timing of your monthly deposits.
This blog takes you through how compounding works in RDs, how it affects your returns, and how to calculate RD returns based on your deposit, tenure, and financial goal.
What is Compounding in RDs?
Compounding is the process of earning interest on interest. When you invest in an RD, you earn periodic interest. In a cumulative RD, when this interest is added to your savings, future interest calculations can include the total monthly contributions plus the accumulated interest, unlike simple interest, which is calculated only on the total monthly contributions.
The longer your money stays invested, and the more frequently interest is credited, the more your savings can grow through compounding.
Note: The interest calculation method and compounding frequency may vary by bank and RD product. Confirm these terms with your bank before booking an RD.
How Compounding in RD Works: Example
To understand how compounding affects RD returns, let’s look at an example.
Consider investing ₹3,000 per month for 3 years at an annual interest rate of 7.80%, with interest credited quarterly. The table below shows how the accumulated deposits, interest credited, and total balance can change with each quarterly credit.
Quarter | New monthly deposits | Previous balance + new deposits (amount considered for next interest) | Interest credited | Balance after interest credit |
1 | ₹9,000 | ₹9,000 | ₹175.50 | ₹9,175.50 |
2 | ₹9,000 | ₹18,175.50 | ₹354.42 | ₹18,529.92 |
3 | ₹9,000 | ₹27,529.92 | ₹536.83 | ₹28,066.76 |
4 | ₹9,000 | ₹37,066.76 | ₹722.80 | ₹37,789.56 |
Note: Figures are illustrative. Actual RD returns depend on the bank’s interest calculation method and deposit terms.
After the first quarter, the balance is ₹9,175.50. During the second quarter, you deposit another ₹9,000. So, the amount considered for the next interest calculation is ₹9,175.50 + ₹9,000 = ₹18,175.50.
Factors Affecting Compounding in Recurring Deposits
Several factors influence the impact of compounding on your RD growth:
- Interest Rate: Higher interest rates naturally lead to greater compounding effects.
- Deposit Frequency: More frequent deposits (e.g., monthly vs. quarterly) can enhance the compounding effect.
- Tenure: Longer RD tenures allow more time for compounding to work its magic.
How Do RD Returns Differ With Simple and Compound Interest?
Let's illustrate the impact of compounding on recurring deposit returns with an example:
Suppose you invest ₹5,000 monthly in an RD for 5 years at 6% annual interest rate.
Without compounding:
Total principal = ₹5,000 * 12 * 5 = ₹3,00,000
Simple interest = (₹3,00,000 * 6 * 5) / (2 * 100) = ₹45,000
Total amount = ₹3,45,000
With quarterly compounding:
Using the formula mentioned earlier, the maturity amount comes to approximately ₹3,54,662
The difference of ₹9,662 is purely due to the effect of compounding.
Disclaimer:
The above example is for illustration purposes only. Ujjivan doesn’t take any responsibility for the accuracy of the information. Please use our calculator or reach out to the customer support to know your RD returns.
Strategies to Maximise Compounding in RDs
To make the most of compounding and enhance your RD growth, consider these strategies:
- Start Early: The earlier you start your RD, the more time compounding has to work.
- Select High Interest RD: Open RD with a bank that offers higher interest rates.
- Reinvest Matured RDs: Instead of withdrawing matured RDs, consider reinvesting them to leverage compounding further.
How to Calculate RD Returns for Your Financial Goal
Manual calculations can be time-consuming and leave room for errors. For quick results, use Ujjivan SFB’s online RD Calculator.
Follow these steps to calculate your RD returns:
1. Open Ujjivan SFB’s Financial Calculators
2. Select the RD Calculator
3. Select whether you are a regular individual or a senior citizen, as senior citizens are eligible for a higher interest rate
4. Enter your monthly deposit amount using the slider or by typing the amount
5. Select your investment tenure
The applicable interest rate is automatically applied based on your selection. The calculator then shows your total investment over the tenure, the interest you can earn, and the maturity amount.
You can adjust your monthly deposit and tenure to see how much you need to save to reach your financial goal.
Final Thoughts
The impact of compounding on recurring deposit returns is truly remarkable. Understanding and harnessing the power of compounding can significantly accelerate your RD growth and help you reach your financial goals faster. Remember, time is a crucial factor in compounding, so the earlier you start, the more you gain.
Start small, dream big! Invest in Ujjivan Small Finance Bank’s Recurring Deposit and enjoy higher interest rates! Save for your long- and short-term goals with our RD and live a stress-free financial life. Start investing with just ₹100!
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