Jan. 18, 2016, 7:05 p.m.
Recurring deposit is scheme offered by banks where a person deposits monthly installment and banks gives higher interest rates than saving account. Recurring deposit is kind of fixed deposit and interest rates of recurring deposit is just little less than fixed deposit.
Recurring deposit is suitable for those people who have constant source of income, for example salaried people. It is best solution for medium term saving (6 months to 3 years) with higher interest rates.
Recurring Deposit Interest : The interest rates given by banks is generally above 8.0% and it is compounded quaterly (means when your money gains interest in a year).
You should know how to calculate compound interest in order to calculate recurring deposit maturity amount, you had studied compound interest in your school (formula is given below).
Lets take an example and then we will calculate recurring deposit step by step with explanation.
Example: Suppose you want to puchase a motorcyle next year and you want to save some money for it but you also want higher interest rates, so you chose to start RD. You start an RD of Rs.5000 for 1 year. So you are going to deposit Rs.5000 in the bank for next one year. And your bank gives you interest 8.25% for 1year compounding quaterly.
This means, for you first installment of Rs.5000, you'll get 8.25% interest for 12 months from the bank compounding quaterly. For the second installment, you'll get 8.25% interest for 11 months compounding quaterly, and for third installment of Rs.5000, you'll get 8.25% interest for 10 months compounding quaterly and so on.
Recurring Deposit Formula
A = Maturity amount.
P = Principal amount (In our case, it is Rs.5000)
R = Interest rate in decimal, convert interest rate into decimal by dividing it by 100 (In our case, 8.25/100 = 0.0825)
T = Time duration in months (In our case, it will be 12 months)
t = Time duration in years
N= compounding frequency (since it is quaterly, it will be 4)
Calculating recurring deposit maturity amount:
Now, we will calculate amount (A) from above formula for each installment we pay, starting from first month to 12th month and then add all of them. So the final maturity amount will be
A = A1+A2+A3+.....+A12
A1, A2, A3,,,A12 are the maturity amount for respective installment.
|1||5000||0.0825||12||12/12||4||A1 = 5425.44|
|2||5000||0.0825||11||11/12||4||A2 = 5388.64|
|3||5000||0.0825||10||10/12||4||A3 = 5352.10|
|4||5000||0.0825||9||9/12||4||A4 = 5315.80|
|5||5000||0.0825||8||8/12||4||A5 = 5279.75|
|6||5000||0.0825||7||7/12||4||A6 = 5243.94|
|7||5000||0.0825||6||6/12||4||A7 = 5208.38|
|8||5000||0.0825||5||5/12||4||A8 = 5173.05|
|9||5000||0.0825||4||4/12||4||A9 = 5137.97|
|10||5000||0.0825||3||3/12||4||A10 = 5103.12|
|11||5000||0.0825||2||2/12||4||A11 = 5068.51|
|12||5000||0.0825||1||1/12||4||A12 = 5034.14|
|A = 62730.84|
Using the above formula, we have calculated amount for each installment and then added all of them to get our final maturity amount.
For the first 500 that you deposited in the bank, you will get interest for 12 months (t = 12/12 = 1), and for the second installment that you paid, you'll get interest for 11 months.
Its not that hard to calculate RD maturity amount, you just need to understand the formula for calculating recurring deposit maturity amount.
I trid best to explain. Please let me know if you have any further queries.