Recurring Deposit (RD), a form of term deposit, is offered by all banks across the country as well as post offices. The popularity of RDs is because of regular periodic payments that investors can put in, unlike fixed deposits (FDs) where a single payment is made. RDs allow investors to deposit a fixed amount periodically. The term for RDs normally ranges between 6 and 120 months.
RDs also offer risk-free investment opportunities to investors. Hence, they are popular among risk-averse investors. Other similar investment tools in the same criteria are Bank RDs and Debt MF through SIPs, which investors can also look at. Experts say short-term investments in these funds are considered safer, as these investments remain unaffected by daily fluctuations in the equity markets.
If you are also planning to invest in an RD, know how your options differ:
Post Office Recurring Deposits
Nine saving schemes are offered by the Post office, one of which is the Recurring Deposit. It not only offers attractive interest rates to the investor, but investors can also opt for monthly deposition, unlike term deposits. Post office RDs offer an interest rate of 7.2 per cent per annum compounded quarterly. However, note that there are no income tax benefits provided for RD investors.
On a year-to-year basis, the RD account can be continued for an additional 5 years. Post office RDs come with restrictions on withdrawal before the end of the term. For instance, if you have opened a Post Office RD for a tenure of 5 years, premature withdrawals from that account can result in a reduced rate of return.
Bank Recurring Deposits
Bank recurring deposit offers interest to the depositor depending on the amount he/she contributes and the tenure of the deposit he/she chooses. These interest rates offered by banks are similar to the interest rates offered by term deposits. One can also avail of a loan with one’s RD, as banks accept these kinds of deposits as collateral. An investor can take a loan of up to 80-90 per cent of the value of the deposit.
The term for the bank RD varies from 1 to 5 years. Additionally, both the bank RD and post office RD comes with the restriction on withdrawal before the term ends. Also, note that the tenure and the interest rates of bank RDs may vary from bank to bank.
RD also comes with the process of periodical payment similar mutual fund SIP, however, the objective is not to generate a higher return, but through rupee-cost averaging reduces the risk. Because of which the rate of return is not fluctuating and is convenient for risk-averse investors. RDs can also be used as a tool to accumulate an amount required for lump-sum payments, for instance, lumpsum payment required for insurance premiums.
Debt Mutual Fund
Through systematic investment planning, investors can invest a fixed amount with regular intervals in mutual fund schemes. These mutual fund schemes are mostly related to equities. The investment is mostly in a combination of debt or fixed income securities, under debt mutual funds. For instance, under debt mutual funds, deposits are generally invested in Corporate Bonds, Money Market instruments, Treasury Bills, Government Securities, and other securities. On average, according to industry experts, SIP in debt mutual fund can offer investors return of around 7 to 8 per cent.
Investors can also customize his/her SIP according to needs and requirements. The choice can be made daily, weekly, monthly, quarterly, or yearly. It also offers an array of flexible options, such as one can start SIP for an additional amount or cancel an existing SIP and again start a new one.
The Rupee Cost Averaging method is followed by SIP. This helps the investor to average his/her purchase cost and maximize returns. Unlike bank/post office RDs, investors can make withdrawn from debt mutual funds without any additional penalty on it.