When I look at a fixed deposit (FD), I’ve learned to slow down for one step before I compare rates or tenures: I check how the interest is calculated. That one detail—simple versus compound—often decides whether two “similar” FDs actually deliver similar maturity values.
Simple interest: clean math, no reinvestment effect
With simple interest, interest is calculated only on the principal. The interest earned doesn’t get added back to the principal to generate additional interest.
The way I keep it in my head is:
Same principal base throughout.
So if I place ₹1,00,000 in an FD at 7% per year for 3 years on a simple interest basis, the yearly interest stays ₹7,000. Over 3 years, it adds up to ₹21,000, so the maturity value becomes ₹1,21,000 (before taxes, if applicable).
Simple interest feels “steady” and easy to track. It fits well when the FD is designed to pay me interest out at regular intervals—monthly, quarterly, or annually—because I’m not expecting that interest to build on itself inside the FD.
Where it can fall short is growth. If I’m aiming to maximise the final maturity amount, simple interest usually won’t do as much heavy lifting as compounding.
Compound interest: the quiet advantage of time
With compound interest, the interest earned is periodically added back to the principal. That means the next round of interest is calculated on a larger amount—principal plus accumulated interest.
This is where people say “interest earns interest,” but the practical meaning is simple:
My base grows over time.
If I take the same ₹1,00,000 at 7% for 3 years, but the FD compounds quarterly, the maturity amount becomes higher than ₹1,21,000 because the interest is being reinvested every quarter. The difference may not look dramatic over one year, but as the tenure stretches, that gap becomes more noticeable.
In my own comparisons, I treat compounding like a long runway—it’s not always loud in the beginning, but it steadily adds momentum.
Compounding frequency: same rate, different outcome
This is a detail many investors miss early on (I did too). Two FDs can quote the same interest rate, but:
- one may compound annually,
- another may compound quarterly or monthly.
More frequent compounding generally pushes the effective yield slightly higher. It’s not magic, and it won’t double returns, but over meaningful amounts and longer tenures, it does show up in the maturity value. That’s why I look for the “effective annual yield” or confirm the compounding frequency before making a decision.
How I decide which one suits me
I don’t treat simple versus compound as a “better/worse” debate. I treat it as a purpose question:
- If I want periodic income: I lean toward a non-cumulative FD where interest is paid out regularly.
- If I want maturity value to grow: I usually prefer a cumulative FD where interest compounds and is paid at the end.
- If flexibility matters: I check premature withdrawal penalties, because they can quietly reduce the return I thought I was locking in.
- If I’m comparing options seriously: I factor in tax impact because FD interest is generally taxed as per my slab rate.
And yes, it’s easy to open fd account online now, but I don’t let convenience replace clarity. Before I open fd account, I always check three things in the product details: payout option, compounding frequency, and premature closure rules.
For me, the real takeaway is this: the interest rate is only half the story. The other half is how that rate works over time. Once I understand whether it’s simple or compound—and how often it compounds—FD comparisons become far more honest, and my planning becomes far more accurate.
