What is Annualised Yield in Fixed Deposit and How it Affects Final Returns?

Did you know that a SEBI survey reveals that about 95% of Indian families rely on fixed deposits? It is not only the overall safety of their investments, but the annualised yield that attracts them, as it shows how their money actually grows over time. 

If you are planning on booking an FD, learning what is annualised yield in a fixed deposit helps you compare between FD options, estimate return and choose one informedly. 

Quick Synopsis

• Annualised yield reflects your yearly return by factoring in compounding frequency.
• More frequent compounding increases your final FD returns even at the same interest rate.
• A 8.15% FD compounded quarterly gives a higher yield (8.40%) than annual compounding.

A Brief on the Annualized Yield in Fixed Deposit

Annualised Yield shows the annual return on a fixed deposit by factoring in how often your interest is compounded. That’s why even when two FDs offer the same interest rate, the one with more frequent compounding ultimately earns you more.

For instance, if you invest ₹1 lakh in two FDs at 7.5% for 5 years, one compounded quarterly and the other annually, the difference becomes clear. With quarterly compounding, you earn ₹44,995 in interest, while annual compounding gives you ₹43,563.

Formula to Calculate the Annualised Yield on Fixed Deposits 

Now that you have an idea of what is annualised yield in a fixed deposit, how it increases your return based on compounding frequency, you must learn the effective rate of yield. 

Here is a detailed breakdown of the applicable formula to calculate the yield:

• The standardised formula to calculate the annualised yield on FD is APY = (1+i/N)^N - 1.
• Here, the ‘i’ represents the applicable interest rate on your Fixed Deposit that you booked. Continuing from the previous example, it is 7.5% per annum.
• The ‘N’ is to represent the number of compounding throughout your FD tenure, i.e. 5 years as per the example.
• Now, let us integrate this formula with an FD of ₹1 lakh at 7.5% interest PA for 5 years. 
• Here, the APY = (1+0.075/4)⁴-1. This generates an annualised yield rate of 0.0771 or 7.71% approximately.
• From the example, you can clearly see that an FD offering 7.5% per annum with quarterly compounding gives you an annualised yield of approximately 7.71%

Factors that Impact Annualised Yields on a Fixed Deposit

Apart from taking a note of what is annualised yield in a fixed deposit, you must have further insights about the factors that impact such yield and increase your return potential:

• Not only the compounding interest frequency but the interest rate also impacts the overall annualised yield. If you increase the interest in the example to 8% PA, for a ₹1 lakh investment quarterly, you will get ₹48,595 after 5 years. 
• Also, if you stay invested for a longer tenure, you will get a higher interest in return due to compounding and subsequently the annualised yield. 
• Decisions like premature withdrawals also impact your overall yield. Plus, your FD provider might impose a penalty, adding a further expense to your investment.

Significance of Annualised Yield in a Fixed Deposit 

After understanding what is annualised yield in a fixed deposit and how to calculate its rate, here are some of its significance you must note for an informed decision:

• With the easy-to-understand formula, you can estimate the yield rate for any given interest rate and tenure. 
• As you have already seen, the higher the frequency of compounding, the higher the return you get. Thus, to earn more, an annualised yield on FD might help you to choose monthly or quarterly compounding over half-yearly or annual compounding.
• Another importance of annualised yield is that it helps you plan multiple FDs instead of investing in a single scheme. For example, if one FD offers only half-yearly compounding, you might create another with quarterly or monthly compounding to enhance your overall return potential.

Final Word

Before investing in an FD or as an existing investor, you must understand what is annualised yield in a fixed deposit. It helps you see how compounding works on your deposit and how more frequent compounding can lead to higher overall returns.

Invest in a 3-year FD offering 8.15% via Stable Money and see your effective returns rise to around 8.40% with quarterly compounding. Download the app now!