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

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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?