Deposits with interest capitalization

A deposit is the least profitable financial instrument, but at the same time the least risky. If you keep deposits in different currencies and more or less stable banks (no one has yet canceled the rule of baskets and eggs), the risk of losing your savings is practically reduced to zero.

So, if you decide to put money on deposit, you need to know a few secrets of this “kitchen” in order to maximize your “hard-earned” money. The first and most important question: “What type of deposit to choose?”. In Russian banking practice, two types of deposits are most often encountered by type of interest:

With interest at the end of the term.
With the capitalization of interest.
Classic deposit
The essence of the first deposit, or as it is also called the classic deposit, is that the bank once for the initial deposit amount or the amount that was formed on the expiry date of the deposit period (for deposits with the possibility of additional deposits) amounts to the interest specified in the contract. That is, the bank on the last day of the agreement will accrue interest on the amount on the account amount.

What is a deposit with a capitalization?
A deposit with interest capitalization is a deposit on which a bank charges interest specified in the contract at specific time intervals (day, month, quarter). In simple words: the bank monthly calculates the monthly rate on the balance of the account, and the next month on the balance, taking into account the previous charge.
The difference in the profitability of the two types of deposits
If with a classic deposit everything is more or less clear, then it is worth talking about a deposit with capitalization in more detail. Many experts consider this deposit more profitable than a classic one. We can easily verify this.

To calculate the profitability of the deposit formula is used:

P – the initial deposit amount;
Z – interest paid for the specified period;
I – the negotiated annual interest rate;
J – the number of calendar days in the period for which capitalization is carried out;
K – calendar days of the year.
Modern technology will help to quickly cope with this task. To calculate the profitability of the deposit, you can use MS Office Excel, as the most visual and easy to use. So, take for example, 300 thousand rubles, divide them equally and put two deposits in a conditional bank at 15% per annum for a period of one year. For simplicity, we assume that the beginning of the deposit will be January 1, and the end, respectively, December 31. For a deposit with a capitalization, interest will be calculated on a monthly basis, and for both deposits there will be no provision for additional investments.

Calculate the profitability of the deposit with the capitalization. To do this, first calculate the monthly interest rate. For January, it is calculated as 31/365 * 15%. That is, the annual rate is divided by the number of calendar days in a year and multiplied by the number of days in the reporting month. As a result, we get 1.27%. Next, we calculate the amount of interest for the reporting month, multiplying the amount by the end of the period, by the monthly interest rate. Making the calculation, we get 1910.96 rubles. We add up the amount at the end of the period and the accrued interest, we get 151,910.96 rubles, which will be the interest that will be charged next month. Having calculated capitalization in a similar way in subsequent periods (see table 1), at the end of the deposit period we will receive RUB 174,113.05, or RUB 24113.05 of profit.

Now let’s calculate the profitability of a classic deposit. To do this, simply multiply the annual rate by the amount at the end of the period. That is 150000 * 15% and we get 22,500 rubles of profit (see table 1).

As we can see, under equal conditions, a deposit with a capitalization allows you to get more profit than a classic contribution.

It is worth noting that banks, as a rule, try to lower the interest rate on deposits with capitalization in comparison with classical deposits. Therefore, you need to take into account the difference in interest rates when deciding on the type of deposit.

Opening deposit with capitalization
Opening a deposit with interest capitalization is not fundamentally different from opening a classic deposit. When you make a contract for the opening of this deposit, you must adhere to several important principles. First, you need to carefully read the contract. In addition to the general provisions, it should clearly indicate the interest rate and the period for which the deposit is capitalized. If in the contract the wording of these parameters is blurred, which is quite rare in modern banking practice, it is better to refrain from concluding such a contract.

To make a decision on the future deposit, do not hesitate to ask a bank employee to read the profitability of various types of deposits under the terms of this bank. It is desirable that the calculations of the profitability of the deposit were recorded.