Recurring deposit is the most popular form of monthly investment and is suitable for all types of investors. Also known as Cumulative Deposits or RD, this encourages regular savings, wherein investors can invest a fixed amount every month for a fixed period.
Choosing between a fixed deposit (FD) account and a recurring deposit (RD) account can be very confusing for anybody like me or you.
If you have got financial goals set for the future and can only afford to spare small monthly savings, opening a recurring bank deposit is an ideal choice.
At the end of the tenure, you will have a certain amount of savings collected in your bank account. This is besides the additional profit of 7-8% earned as interest income.
But with a fixed deposit also offering almost similar benefits as a recurring account, there is a confusion about which one to opt and why?
Here are three things to know:
1. If you have small monthly savings:
The amount of spare money lying with you has a big say in whether you open a recurring account or start a fixed deposit. If the amount is a large one and you don’t need the cash for any immediate needs, then opening a fixed deposit account is more beneficial.
But, for first timers, with small savings after meeting all monthly expenses, a recurring deposit account is a better option. All you need to do is deposit the small monthly amounts saved for a fixed span of time that can range from 6 months to 10 years.
The advantages are obvious. An RD account encourages savings and helps to build a large reserve for a more secure financial future.
2. Which earns greater interest?
You have to understand that a fixed deposit will earn more income on the same amount than a recurring account. You may ask why, especially since the rate of interest on both is the same?
This difference lies in the theory of compounding – earning interest on interest. The more you save and the quicker you save, the more interest you earn on the interests. It is simple. I will earn interest 10 times annually in 10 years, but only 5 times in 5 years. Moreover, I will earn more interest on Rs 100 than Rs 50. Add both these together, and you understand why fixed deposits earn more than recurring deposits despite the fact that both are compounded on a quarterly basis. You deposit a large amount upfront in a fixed deposit, whereas on a recurring deposit, the deposit value increases month by month. So, the interests earned will vary from month to month.
If on maturity of a RD account, you don’t need the money; converting the amount collected into a fixed deposit is an excellent way of saving up and earning good interest income out of it.
3. Advantages of a recurring deposit account:
Like fixed deposit accounts, recurring deposits are safe investments that guarantee good returns. A recurring deposit comes handy if you suddenly need money for meeting some emergency like paying up hospital bills in case of some major illness. Moreover, you don’t put away all your money into a deposit account all at once. You do so in installments. This helps your liquidity needs.
With the money collected at the end of the tenure, you can meet both short-term goals like money for the down payment for buying a new car, a fridge, new furniture and long-term goals like saving up for higher education of children, buying a house or meeting wedding expenses of children.
You can also take a loan against your RD account or breaking up the account mid-way, depending upon how much cash funds you need immediately. In both cases there will be some interest loss for you but you will have ready cash when you need it most.