The Story Behind the Work
Rajendra Agrawal and the search for the correct RD maturity value
The Rameshta Formula began as a personal financial question and became a study of how recurring deposit maturity is calculated across banks.
Definition of recurring deposit
A recurring deposit is a special term deposit product provided by banks in India and by post offices. It helps people with fixed income deposit a fixed amount every month into a recurring account and earn interest at a rate applicable to fixed deposits. In practical terms, it is similar to making a monthly installment toward a fixed deposit.
Introduction
In a recurring deposit, a person invests a fixed amount of money every month for a certain period. At maturity, the investor receives the total investment along with interest. The interest rate on recurring deposits is generally similar to fixed deposit rates, and the invested funds typically earn compound interest on a quarterly basis. Interest is paid only at maturity.
If a person has future financial goals but can invest only a small amount every month, recurring deposits can be an ideal product. If a person has idle cash available immediately and wants to invest for a financial purpose, a fixed deposit may be a better option than a recurring deposit. Banks and post offices may define their own RD tenure rules, while this calculator accepts whole-month tenure values for calculation.
A recurring deposit is considered a safe financial product and provides a reasonably good return. Tax Deducted at Source, or TDS, is applicable on recurring deposit interest. If the interest earned crosses the applicable threshold, banks may deduct tax from the interest according to prevailing rules.
Benefits of a recurring deposit
- It normalizes regular savings.
- It encourages a savings habit.
- It helps build a larger corpus over time.
- It supports planning for future financial needs.
- It can help liquidity planning because the investor does not need to invest all funds at once.
- It is useful for new investors who are just starting their career.
- It can support short-term goals of one to three years.
Purpose of the literature
Rajendra Agrawal first planned to invest through a recurring deposit. When he asked a bank executive for details, he was told that maturity amount and interest rate information could be found online. After checking bank information online and calculating manually, he found that the maturity amount shown by the bank and the amount calculated manually did not match.
He then started calculating the maturity value of recurring deposits from other banks. Again, he found differences between the maturity amounts shown by banks and his manual calculations. After deeper study, he found that the formula used by many banks produced a different, often lower, value than the manual calculation.
He also observed that some banks appeared to provide a maturity amount lower than the amount produced by the common bank formula, while one or two banks gave a higher maturity value than the manual calculation. To him, this suggested that banks were not consistently giving the exact maturity value of recurring deposits.
The purpose of the literature is to present a correct formula for calculating the maturity amount of recurring deposits, so that banks can rectify their calculations and customers can receive the actual interest value their deposits deserve.
The two tasks
To innovate a correct formula for recurring deposits, Rajendra Agrawal identified two tasks. The first was to understand how the formula used by banks had been derived. The second was to identify the error in that formula. After deep study, he understood the derivation and located the point of error.
Task one: Study the existing bank formula and understand how it was derived from compound interest.
Task two: Find the mathematical error in the existing approach and create a formula where the compounding period count remains a whole number.