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Understanding Annual Percentage Yield (APY) and Its Calculation
Posted on Wednesday, April 24th, 2024 | By IndusInd Bank
Annual Percentage Yield (APY) is a percentage earned in one year on a Certificate of Deposit or a high-yield savings account. It is different from a simple interest rate as APY considers compounding. Simply put, a higher APY corresponds to greater earnings.
What does APY mean?
APY means compounding interest, which is earned on the sum of principal and accumulated interest; hence, this interest is higher than simple interest, which is computed only on the principal. Thus, the APY helps us understand the best place to invest our money. Interest can be compounded yearly, quarterly, monthly, or daily. Accounts that compound frequently earn more interest, which is added to the account more often.
Hence, when choosing a bank account, it is essential to consider the APY meaning in banking and not just the simple interest rate.
Understanding Typical APY Rates
The typical APY varies based on financial institutions, market conditions, and government policies. The chart below is only indicative of the various financial products.
| Financial Product | Simple Interest Rate/Return (per annum) | APY (Compounded Monthly) |
| Savings Accounts | 3% – 4% | 3.04%- 4.07% |
| Fixed Deposits (FDs) | 4% – 7% | 4.07% – 7.23% |
| Recurring Deposits (RDs) | 4% – 7% | 4.07% – 7.23% |
| Public Provident Fund (PPF) | 7% – 9% | 7.23% – 9.38% |
| Equity Mutual Funds | 10% – 15% | 10.47%-16.07% |
| Debt Mutual Funds | 5% – 9% | 5.12% – 9.38% |
APY Formula Uncovered
The formula for APY is
APY = (1 + r/n)n – 1
The ‘‘r’’ variable is the interest rate in decimal form, So, a 5% interest will be 0.05 and “n” is the number of compounding periods per year. To illustrate, let us say you have opened a bank account with a savings account interest rate of 3% compounded monthly (12 times in a year); therefore, r = 0.03 and n = 12; therefore, the APY will be:
APY = (1+0.03/12)12– 1
APY = 3.04%
Also Read: How Interest Rates Impact Your Savings Growth
Discovering the APY for an Account
You can use a calculator to find the APY for an account. Typically, banks and financial institutions furnish APY information on their products, enabling investors to make informed decisions by knowing the exact yield on their investment.
Does APY Change
An APY can be variable or fixed. Variability depends on the nature of the financial instrument. Hence, while a Certificate of Deposit provides a fixed APY, that of a savings account can be variable. The variability is dependent on the RBI policies.
APY is a good measure of the total returns on your investment and aids in informed decision-making but make sure to check other factors as well when considering a new account. Investors must diversify their investments across high-yield savings accounts, Certificates of Deposit, and investment accounts to make the most of fluctuating rates. A high-yield savings account typically offers higher interest than a regular savings account. Open a savings account online with IndusInd Bank, which offers many benefits and discounts on purchases.
Also Read: Exploring High-Yield Online Savings Accounts: What to Look For
Disclaimer: The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. Hence, you are advised to consult your financial advisor before making any financial decision. IndusInd Bank Limited (IBL) does not influence the views of the author in any way. IBL and the author shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information.
