How does Fixed Deposit work and how to Calculate FD Interest?

Fixed deposit (FD) is a type of investment which lets you to invest a relatively large sum of money at a bank. It is deposited for a fixed time period and fixed rate of interest. It is one of the most safer and popular investment options that you get in Malaysia.

Fixed deposits are fundamentally bank deposits that mature after a fixed or specified time period as determined by you, the investor, in agreement with banking terms and your bank’s terms and conditions. Your invested amount gathers more fruition by the time, as it grows at a fixed rate of interest. Since the maturity tenure and the interest rate associated with it are fixed, this investment product is called a fixed deposit or FD. It is called term or time deposit in a few countries, while a few others call it a bond. 

Interest Rate involved in an FD

When you open a fixed deposit account at a bank in Malaysia, the bank pays you interest for the money you are lending to it. This means, your fixed deposit investment is the bank’s asset and your account is its liability. lending money to the bank and it pays you interest.

Every bank has its own way of offering a lot of different options on fixed deposit rates. The rate of interest may vary from time to time. Now, FD involves two different parameters of time period. One is the tenure over which your fixed deposit earns interest. The other is the final time period when your deposit matures. 

Maturity value is the amount you earn or receive from the bank by the end of your fixed deposit term. 

Calculate fixed deposit (FD) interest rate

In this digital age, calculating fixed deposit just got a whole lot easier! All you have to do is visit one and enter your deposit amount, annual interest rate, and time period or intervals through which you want to earn the interest. The tool automatically displays the amount you earn in addition to your original FD investment. 

The above image is from a site called “calculator.com.my”, which is a multipurpose portal of online calculators for various needs such as loans, credit cards, currency, and so on. If this seems to be a hassle for you, there are always consolidated charts with interest rates in the websites of banks that offer FD. 

But if you prefer,

Deposit amount x Annual interest rate x (tenure in months/12 months) = Interest you earn.

So, if you open an FD account to invest RM10,000 at an interest rate of 2.5% p.a. for a 3 month tenure, the maturity value you get paid would be: 

[10,000 x 0.025 (3 months / 12 months)] = RM62.63 

Early withdrawal of FD

You are allowed to withdraw your amount only when your fixed deposit investment matures. Early withdrawal may result in penalties or an acute loss of interest earned or accumulated, as a termination fee. 

But there are a few banks in Malaysia like Hong Leong Bank, whose fixed deposit account offers premature withdrawals with a few flexible conditions. No interest is payable on partially withdrawn FDs prematurely but you do not get to incur a premature withdrawal penalty. This feature is extremely important in today’s scenario as you get the perk of withdrawing some money in times of financial duress. This isn’t something you get in most banks, an early withdrawal is something that financial institutions try to heavily cash in on, as it makes customers vulnerable! 

You don’t stand to lose interest on the available balance after partial early withdrawal.

The added advantage with an FD account at Hong Leong Bank is that, you continue to accumulate and earn interest on the amount that is already there in your FD account, aside from the amount you partially withdrew, prematurely! The onus is on you to choose wisely after self-evaluating the financial cushion and stability that you are looking out for out of a fixed deposit account in Malaysia.