Reviewed by: Fibe Research Team
When you invest in a fixed deposit (FD), you are guaranteed a fixed return. But did you ever check how much you actually earn in a year? Annualised yield gives a clearer picture of your earnings, especially with compounded interest. It allows you to compare FD returns across banks and tenures correctly.
Two FDs may have the same interest rate, but the one with more frequent compounding allows you to earn more. Understanding the annualised yield on an FD helps in choosing the one with the best returns.
Annualised Yield, or Annual Percentage Yield (APY), is a financial measure that computes the annual return on a fixed deposit. It takes into account the impact of compounding interest with tenure.
Unlike general interest rates, an annualised yield gives you an idea of your net return annually if the interest is compounded on time as per the issuer’s policies. It helps you compare various FD options based on several crucial factors, including:
By helping with FD comparison, goal setting and assessing risk and returns, annualised yields prove to be crucial. Some of the reasons why this figure is important include:
When you choose to save with a fixed deposit, your return is not based on the interest rate alone. Here are some factors affecting the annualised yield on FDs that can help you assess your actual returns better:
The annualised yield on an FD helps save time when you want to know how much your fixed deposit is generating in income annually. It is not the advertised FD interest rate, but the frequency at which your interest is compounded and what exactly it means in terms of gains.
Knowing how to calculate the annualised interest rate is as easy as using this formula:
APY = (1+r/n) n-1
Here ‘r’ is the nominal interest rate and ‘n’ is the count of compounding periods in a year
This formula shows how compounding increases your returns in the long run. For instance, say you invest in an FD of ₹10,000 at an interest of 8.50% for 3 years. Let’s assume that you calculate your returns without the compounding frequency. This results in a simple interest of ₹2,550. Now, if you do the same calculation by adding a quarterly compounding frequency, your interest earnings will amount to ₹2,870.
Thus, annualised yield helps you calculate your returns better, so you can make smarter investment choices. If you are unsure about this calculation, you can opt for a free-of-cost annualised yield calculator online.
You may also often see FD issuers advertising effective annualised yield. The formula for this is as follows:
Effective Yield = Amount Received/Initial Investment tenure
In this example, it comes to ₹2870/3 = ₹956.667. The percentage yield is 9.56%. When seeing this rate, do not compare it with the FD interest rate of other issuers. Instead, compare annualised yield rates and do not forget to calculate your post-tax returns to get an idea of your actual gains.
Effective annual yield is also known as APY and is a financial metric used to calculate the total return on your FD investment. This considers the final compounding within a year, depending on the compounding frequency.
The interest rates are the annual return percentages you can earn on a potential investment. Effective yield measures the returns after considering compounding and the gains from reinvestment of interest to your initial principal over the course of your investment duration.
Effective yield is important because FDs are usually compounded more than once annually when you choose to get your returns either annually or at maturity. So, understanding this amount helps you calculate your gains more accurately. However, issuers may give you a higher yield figure, taking into account a longer tenure that you want to invest in. It is always better to calculate your potential returns using an annualised return calculator.
The formula for EIR (effective interest rate) is:
Effective Yield = Amount Received/Initial Investment