The reason is compounding.
Suppose you opened two different FD accounts on January 1st for a 1-year term with the same bank for an amount of Rs.1,00,000 each. For the first FD you chose to receive interest along with the principal at the end of the term and for the second, you chose quarterly payout of interest. For simplicity sake lets assume the interest is calculated on a quarterly basis.
This is how the cash-flow for the two deposits would look like:
|Tenure||1 Year||Tenure||1 Year|
|Principal||Rs. 1,00,000.00||Principal||Rs. 1,00,000.00|
|Rate||10.00% p.a. Quarterly Comp||Rate||10.00% p.a. Quarterly Comp|
|Month||Interest||Account Bal||Month||Interest||Account Bal|
|January 01||1,00,000.00||January 01||1,00,000.00|
|March 31||+2,500.00||1,02,500.00||March 31||+2,500.00||1,00,000.00|
|June 31||+2,562.50||1,02,062.50||June 31||+2,500.00||1,00,000.00|
|Sept 31||+2,626.56||1,07,689.06||Sept 31||+2,500.00||1,00,000.00|
|Dec 31||+2,692.23||1,10,381.30||Dec 31||+2,500.00||1,00,000.00|
|Total Payout||1,10,381.30||Total Payout||1,00,000.00|
|Interest Earned||10,381.30||Interest Earned||10,000.00|
|Effective Return||10.38%||Effective Return||10.00%|
How is interest calculated in Fixed Deposit
Noticed the difference? The total interest payout on the first FD was more than the interest payout of the second FD, where the interest was paid “out” every quarter. This is not a calculation error, but simple mathematics of compounding.
While the second FD paid out interest to you every quarter, the first FD accumulated the quarterly interest. The difference becomes apparent from the second quarter. In the second quarter, the second FD paid an interest of Rs.2,500 while the first FD generated an interest of Rs.2,562.50. The additional Rs.62.50 is the “interest earned on interest”. This need not be confusing; notice the account balances on the beginning of each quarter. The second FD maintains a fixed balance of Rs.1,00,000 i.e. your principal, while the first FD accumulates the interest paid during the previous quarter. While calculating the interest for the 2nd quarter, the first FD takes into account only your principal amount (since the interest of the 1st quarter is already paid to you), whereas the first FD calculates the same rate, but on the aggregate amount i.e. Rs.1,02,500. The Rs.62.50 difference is the interest on the additional Rs.2,500 in the account, a.k.a interest on interest. This is how compounding works.
Companies registered under the Companies Act 1956, such as:
A Non-Banking Non-Finance Company (Manufacturing Company) can accept deposits subject to following limits.
A Non-Banking Finance Company can accept deposits upto following limits:
Company Fixed Deposits can be accepted by a Manufacturing Company having duration from 6 months to 3 years. Non-Banking Finance Companies can accept deposit from 1 year to 5 years period. A Housing Finance Company can accept deposit from 1 year to 7 years.
Companies where you should not invest
There is an old saying [“Don’t Put All Your Eggs In One Basket “.]
Company Deposits should be spread over a large number of companies. This will help you to diversify your risk among various companies/industries. Never put more than 10% of your total investible funds in one company