Yield vs. Interest Rates: How Do They Differ In a Fixed Deposit Scheme?
Financial institutions like banks and NBFCs often advertise on their fixed deposit (FD) schemes. They make their product look more approachable by highlighting its effective annual yield. Fixed deposit schemes are a long term investment, and a lot of investors look for the yield amount after the maturity period.
The rate of interest is also advertised in a product description; this value is given as an annual percentage rate. Usually, the rate of interest of an FD is advertised as a stable, assured return if an investor decides to partner with the financial institution.
Yield commonly means the return you as an investor earn from an investment like a stock, whereas FD interest rates are the amount charged by a financial institution. As an example, NBFCs offers 8.10% – 8.60% interest on their fixed deposit schemes.
Often a customer faces confusion between these two. To help them make a better decision, here is a brief look at some of the main differences between yield and interest rates of an FD.
Difference between interest rates and yield –
One of the easiest ways to understand the difference between these two is with an example.
Let’s say that a company pays a quarterly dividend of Rs. 0.50, and its stock price is Rs. 50. So, their annual yield, also known as current yield, would be 4%. This changes as the stock price, or the dividend value changes. Let’s say that their stock prices increase to Rs. 100, then the yield drops, becoming only 2%.
It is completely different when it comes to FD interest rates. The financial institution offers you a fixed interest on your principal amount. This rate is independent of the market’s condition and is offered till the investment matures. Every year, interest is added to your FD and compounded to calculate the next year’s outcome.
Interest rates on a fixed deposit –
Normally, a financial institution calculates the returns by adding the compound interest to the principal each year. For example, NBFCs offers FD interest rates of 8.60% for 36 to 60 months tenor to their customers. So if you invest a certain sum in that particular fixed deposit plan, you will receive an annual interest of 8.60% on that amount.
Interest rates are calculated over four quarters of a year; whereas yield is the total amount gained over that time, after adding all other monetary benefits.
Interest rates are the amount earned over the principal amount over the fixed deposits maturity period. Normally, it is calculated monthly, quarterly, half-yearly, or annually. It is always calculated in percentage and is independent of yield. Also, you can calculate your fixed deposit with an FD calculator.
Yield on FD –
Yield on a fixed deposit will give you benefits like tax reduction and compound interest mergers till the policy matures. You have to divide the total return with invested years to know the yield on the interest of your FD. In this case, the absolute interest amount stays the same.
Yield is always higher than your FD interest and is annually calculated. Also, it includes the amount of interest you earn over time and shown in percentage or amounts as well. Most of the time, it crosses an FD interest rate by a good margin.
What to look for while choosing a fixed deposit –
It’s important to look for a policy which offers a balance between interest rate and yield. Multiple financial institutions offer tailor-made schemes for investors who are looking for an investment policy with a secure and guaranteed return.
One of the leading financial institutions in India, offers 8.10% interest on their fixed deposit accounts. They won ratings as one of best in the market, especially when they add their benefits for senior citizens. This hikes the interest rate by another 0.35%. Also, their quick processing and minimum document requirement make them a favourite among investors. They also have a minimum deposit limit of only Rs. 25,000.
Fixed deposit is best if you are looking for a worry-free, guaranteed return policy. Financial institutions offer safety, liquidity and ease of investment; they also offer their customers the convenience to manage their account online. All these make them popular among investors around the country.