The current rate of interest on FD is 9.25 %( @ State bank of India for 5 years and up to 10 years).
The advertised effective rate of interest on Post office MIS is 10.94 %(Maturity Period for POMIS is 6 Years).
“Why would I put my money in FD ? ”, would be an obvious question at this point.
But to understand the difference in an efficient way, let’s do some simple math and see how they perform in 1 year duration.
======================================================
Scenario 1a: Fixed Deposit
Let’s start with a sum of Rs. 3,00,000.
Using the compound interest formula:
Principal: Rs. 3,00,000
Interest Compounded: Quarterly
Rate of Interest: 9.25
Time in Years: 1
You earn an interest of Rs. 28,727.5
======================================================
Scenario 2a: Monthly Income Scheme
Principal: Rs. 3,00,000
Interest Compounded: Annually (sad but true)
Rate of Interest: 8
Time in Years: 1
You earn an interest of Rs. 24,000
======================================================
The key difference between MIS and FD lies in how you get back this earned interest .
On investing an amount of Rs. 3,00,0000 in Post Office MIS scheme, you get an income of Rs 2,000 every month, hence the name Monthly Income Scheme. This adds up to an annual interest of Rs. 24000 calculated in Scenario 2a.
Having this understood, let’s see how they perform in 6 years duration.
======================================================
Scenario 1b: Fixed Deposit
Principal: Rs. 3,00,000
Interest Compounded: Quarterly
Rate of Interest: 9.25
Time in Years: 6
You earn an interest of Rs. 2,19,290.02 at the end of 6 years.
======================================================
Scenario 2b: Monthly Income Scheme
If you decide to invest this monthly income of Rs. 2,000 in Post office Recurring Deposit at the current Rate of interest of 8%, this is what future holds for you.
Monthly Deposit Amount: 3,00,000
Interest Compounded: Quarterly
Rate of Interest: 8
Time in Years: 6
You earn an interest of Rs. 182015.65
+
5% bonus on principal(on Maturity): Rs.15,000 .
You earn a total interest of : Rs. 182015.65 + Rs. 15,000 = Rs. 197015.65 at the end of 6 years.
======================================================
Conclusion:
Rs. 2,19,290.02 > Rs. 197015.65
=Fixed Deposit > Monthly Income Scheme
=Fixed Deposit is better than Monthly Income Scheme
Hence proved.
“But where is the 10.94% rate of interest, which is being advertised on the Indian Post office website?”
One way of representing this interest earned above is to divide it by the duration in years.
Rs 197015.65/6 = 32,835 i.e., the interest earned per year.
Now let’s find the per year interest rate on this (32,835/300,000)* 100 = 10.94%.
This is the rate being advertised.
If calculated the same way, the interest rate on Fixed Deposit comes out to be 12.18%.
Copyright © 2011 randomchores.
The advertised effective rate of interest on Post office MIS is 10.94 %(Maturity Period for POMIS is 6 Years).
“Why would I put my money in FD ? ”, would be an obvious question at this point.
But to understand the difference in an efficient way, let’s do some simple math and see how they perform in 1 year duration.
======================================================
Scenario 1a: Fixed Deposit
Let’s start with a sum of Rs. 3,00,000.
Using the compound interest formula:
Principal: Rs. 3,00,000
Interest Compounded: Quarterly
Rate of Interest: 9.25
Time in Years: 1
You earn an interest of Rs. 28,727.5
======================================================
Scenario 2a: Monthly Income Scheme
Principal: Rs. 3,00,000
Interest Compounded: Annually (sad but true)
Rate of Interest: 8
Time in Years: 1
You earn an interest of Rs. 24,000
======================================================
The key difference between MIS and FD lies in how you get back this earned interest .
On investing an amount of Rs. 3,00,0000 in Post Office MIS scheme, you get an income of Rs 2,000 every month, hence the name Monthly Income Scheme. This adds up to an annual interest of Rs. 24000 calculated in Scenario 2a.
Having this understood, let’s see how they perform in 6 years duration.
======================================================
Scenario 1b: Fixed Deposit
Principal: Rs. 3,00,000
Interest Compounded: Quarterly
Rate of Interest: 9.25
Time in Years: 6
You earn an interest of Rs. 2,19,290.02 at the end of 6 years.
======================================================
Scenario 2b: Monthly Income Scheme
If you decide to invest this monthly income of Rs. 2,000 in Post office Recurring Deposit at the current Rate of interest of 8%, this is what future holds for you.
Monthly Deposit Amount: 3,00,000
Interest Compounded: Quarterly
Rate of Interest: 8
Time in Years: 6
You earn an interest of Rs. 182015.65
+
5% bonus on principal(on Maturity): Rs.15,000 .
You earn a total interest of : Rs. 182015.65 + Rs. 15,000 = Rs. 197015.65 at the end of 6 years.
======================================================
Conclusion:
Rs. 2,19,290.02 > Rs. 197015.65
=Fixed Deposit > Monthly Income Scheme
=Fixed Deposit is better than Monthly Income Scheme
Hence proved.
“But where is the 10.94% rate of interest, which is being advertised on the Indian Post office website?”
One way of representing this interest earned above is to divide it by the duration in years.
Rs 197015.65/6 = 32,835 i.e., the interest earned per year.
Now let’s find the per year interest rate on this (32,835/300,000)* 100 = 10.94%.
This is the rate being advertised.
If calculated the same way, the interest rate on Fixed Deposit comes out to be 12.18%.
Copyright © 2011 randomchores.
i am prabir roy i want to invest 100000 rs to bank pls help me sir
ReplyDeleteHi Prabir,
ReplyDeleteUnderstanding that no investment is risk free is a big step towards making an investment.
Even FDs in bank carry the risk of inflation i.e., currency being depreciated.
Best you can do is weigh all the risks associated with the investment and the alternative and go with the one you can live with.
Very informative! Can you also share detail related to income tax saving? I go through all informative posts like this as it really helps me to learn so many new things which are helpful in financial planning and decision making.
ReplyDeleteThanks for writing such a good article, I stumbled onto your blog and read a few post. I like your style of writing... 성남오피
ReplyDelete