Recurring Deposit (RD) is favoured by many investors who
(a) are able to save only small amounts every month,
(b) are looking for safe and assured returns and
(c) fall under the nil / lower income tax brackets.
RD is very easy to understand and implement.
But the formula to calculate the maturity value is somewhat complicated. This is so because
...there is addition to the principal amount every month
...the interest paid by the banks in India is compounded quarterly.
However, Excel has made life quite simple.
You can, now, within a few minutes calculate how much money you will receive at maturity for a given recurring deposit.
Suppose you do a Recurring Deposit of Rs.500 for 36 months @8.75%. Then, the excel formula to calculate the amount receivable on maturity is as under:
= FV(Rate,Nper,Pmt,Pv,Type)
where
FV stands for Future Value
Rate = Modified Rate of interest (I will come to "modified" later)
Nper = No. of deposits to be made (i.e. 36 in this example)
Pmt = Amount deposited every month (i.e. Rs.500 in this example)
Pv = Put this as 0 (PV stands for Present Value which is Zero)
Type = Put this as 1 as the deposit is made at the beginning of the month
Modified Rate of Interest: The interest rate in Recurring Deposits (in this case case of 8.75%) is compounded on quarterly basis. Whereas FV is calculated on monthly basis because we are making monthly deposits.So we cannot directly put the standard bank rate into the above formula.
We have to convert quarterly compounding rate into monthly compounding rate.
But don't worry, this is pretty simple.
Step 1: Convert the given quarterly compounding rate into Effective Annualized Rate
=EFFECT(Nominal_rate,Npery)
=EFFECT(8.75%,4) [Npery is no. of times compounded i.e. 4 in this case]
=9.041%
Step 2: Convert the Effective Annualized Rate into monthly compounding rate
=NOMINAL(Effect_rate,Npery)
=NOMINAL(9.041%,12) [Npery is no. of times compounded i.e 12 in this case]
=8.687%
Now we can apply the FV formula to work out the Maturity Value.
=FV(8.687%/12,36,500,0,1)
=Rs.20,627.38
[Note: Rate is divided by 12 as we are making monthly deposits]
That's it! Quick and simple.
(By the way, there is a still simpler method... you will come across many calculators online. But like me, for those who love to do things for themselves, the above calculations too are pretty straightforward.)
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| Recurring Deposit |
