Fixed income interest rate, power of compounding: Which fixed income investment scheme works better for you, one that pays 7.7 interest per annum compounded annually or one that pays 7.5 per cent per annum compounded quarterly? Well, the answer lies in time. For instance, take a five-year post office fixed deposit (FD) investment and a National Savings Certificate (NSC) investment, which currently yield interest at 7.5 per cent per annum compounded quarterly and 7.7 per cent per annum compounded annually, respectively. Hint: Investment in both matures in five years.
National Savings Certificates (NSC) vs Post Office Fixed Deposit (five years): See how your Rs 30,000 investment grows over time
| Time | National Savings Time Deposit Account (FD) | National Savings Certificates (NSC) |
| End of Year 1 | Rs 32,314 | Rs 32,310 |
| End of Year 2 | Rs 34,807 | Rs 34,798 |
| End of Year 3 | Rs 37,491 | Rs 37,477 |
| End of Year 4 | Rs 40,383 | Rs 40,363 |
| End of Year 5 (maturity) | Rs 43,498 | Rs 43,471 |
While the outcomes of both investments may look similar, they have a significantly different impact. If you take a different example. Since both fixed income instruments used in the example above have no upper investment limit, can you guess how larger investments will work?
National Savings Certificates (NSC) vs Post Office Fixed Deposit (five years): See how your Rs 2.5 lakh investment grows over time
| Time | National Savings Time Deposit Account (FD) | National Savings Certificates (NSC) | Difference (FD>NSC) |
| End of Year 1 | Rs 2,69,284 | Rs 2,69,250 | Rs 34 |
| End of Year 2 | Rs 2,90,055 | Rs 2,89,982 | Rs 73 |
| End of Year 3 | Rs 3,12,429 | Rs 3,12,311 | Rs 118 |
| End of Year 4 | Rs 3,36,529 | Rs 3,36,359 | Rs 170 |
| End of Year 5 (maturity) | Rs 3,62,487 | Rs 3,62,258 | Rs 229 |
Remember that the difference in the interest rates of both schemes is just 20 basis points per annum.
It is worth noticing that after the first year, the gap between the outcomes widens with every passing year to reach 6.7 times till maturity. This is the real power of compounding.
Now, imagine the results of fixed income investment plans of longer durations.
ALSO READ: Power of Compounding: How long will it take to become a crorepati by investing Rs 100 every day? The answer may surprise you
Although a simple concept, compounding yields surprising—and often alarming—results over time. The longer time you attach to a financial situation, the clearer the outcome of different compounding frequencies.
Meanwhile, here’s a list of the interest rates and compounding frequencies applicable to guaranteed-income small savings schemes for the quarter ending June 30, 2024, according to the India Post website, indiapost.gov.in:
| Post office small savings scheme | Interest rate with effect from April 1, 2024 to June 30, 2024 | Compounding frequency |
| Post Office Savings Account | 4% | Annually |
| 1 Year Time Deposit | 6.9% (annual interest Rs 708 for Rs 10,000) | Quarterly |
| 2 Year Time Deposit | 7.0% (annual interest Rs 719 for Rs 10,000) | Quarterly |
| 3 Year Time Deposit | 7.1% (annual interest Rs 719 for Rs 10,000) | Quarterly |
| 5 Year Time Deposit | 7.5% (annual interest Rs 771 for Rs 10,000) | Quarterly |
| 5 Year Recurring Deposit Scheme | 6.7% | Quarterly |
| Senior Citizen Savings Scheme | 8.2% (quarterly interest Rs 205 for Rs 10,000) | Quarterly and Paid |
| Monthly Income Account | 7.4% (monthly interest Rs 62 for Rs 10,000) | Monthly and paid |
| National Savings Certificate (VIII Issue) | 7.7% (maturity value Rs 14,490 for Rs 10,000) | Annually |
| Public Provident Fund Scheme | 7.1% | Annually |
| Kisan Vikas Patra | 7.5% (will mature in 115 months) | Annually |
| Mahila Samman Savings Certificate | 7.5% (maturity value Rs 11,602 for Rs 10,000) | Quarterly |
| Sukanya Samriddhi Account Scheme | 8.2% | Annually |
| (Source: Indiapost.gov.in) | ||
ALSO READ: Post Office Schemes Calculator: FD vs NSC! Which will give you more returns on Rs 10 lakh investment?
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