FD Interest Rate Truth Revealed

FD Interest Rate Truth Revealed ||

Banks, NBFCs often advertise their fixed deposits (FDs) by highlighting “annualized effective yield”. This makes the products look more attractive compared with the rate of interest that they offer. Often depositors get confused between the two. Here is what it means.

Interest Rate on FD
The rate of interest on FD mentioned by the bank is normally the return offered on the principal amount based on compounded interest. It doesn’t include any other factors.

Yield on FD
Yield on fixed deposit includes compounded interest and other factors such as tax benefit till the end of the term. Here the calculation works in reverse.

To know the yield on the interest that you will earn from FD, the total return earned on investment has to be divided by number of invested years and then get the annualized effective yield

To make their product look better than their competitors, some banks will put emphasis on yield. Some financial institutions take into account pre-tax benefit also to show a higher yield figure. However, in non-tax saving FDs, the tax deduction is not adjusted while calculating the yield.

So don’t fall for a higher yield instead of higher interest rate as higher yield doesn’t necessarily mean that you get a better deal. Never compare an X bank’s yield on FD with Y bank’s interest rate.