Is Fixed Deposit Simple or Compound Interest?
You are not the only one asking “Is FD simple or compound interest?.” It is one of the most common questions and quite an important one. The straight forward answer is that fixed deposits generally use compound interest. But since not all FDs are the same, compounding might not be applicable to all. There is an explanation for this, just read through.
As said, banks usually offer compound interest which means that your earnings don’t just sit there. They earn more interest over time. Think of it like a snowball rolling down a hill, the bigger it gets, the faster it grows. Now the catch is, typically compound interest is applicable quarterly, i.e., every three months, your principal + accrued interest both earn more money (interest).
But if you go for short-term deposits, say less than six months. In that case, interest is calculated only on the initial principal, so no compounding magic there.
So, coming back to your question: Is FD simple or compound interest? Most often, it’s compound interest, but do check with your bank to know about the interest rate applicable and if it is compounding, what is the frequency - monthly, quarterly or annually?