Wednesday, November 30, 2022

How is a Fixed Deposit Different from a Recurring Deposit

People of all ages have started to realise the value of investing their surplus savings in a financial instrument to beat inflation and get financial growth. While there are multiple options available to invest your money, not all of them offer the same kind of absurdity and returns. An individual should choose the investment scheme that matches his risk appetite and gives reasonably high returns. 

Individuals who do not want to gamble their money in investment options that offer no security of investment can choose fixed deposits (FD) or recurring deposits (RD) to meet their financial goals. Fixed deposits are fixed-return investment schemes. The fixed deposit interest rate is higher than a bank savings account but offers the same level of safety on the invested money. The fixed deposit minimum amount may be as low as Rs.1,000, and some open an account for a fixed deposit minimum amount of Rs.10,000 so that the investors can get substantial returns on their investment. 

Here is a detailed guide to FDs and RDs and the difference between fixed deposit and recurring deposit schemes. 

Fixed Deposit Explanation

A fixed deposit is an investment scheme that banks offer to customers. Under a fixed deposit scheme, the investor deposits a lump sum amount with the bank for a tenure ranging from 7 days to 10 years. The tenure of a fixed deposit scheme can vary between seven days to 20 years. An investor who has some short-term financial target can open an FD account for a short duration. Individuals who want to keep their money untouched for years to meet some long-term financial goal can choose a longer tenure. 

The bank pays the FD holder a pre-decided interest on the deposit money. The fixed deposit interest rate varies for different investment schemes, the principal amount invested, and the fixed deposit tenure. Most investors choose a fixed deposit scheme over other investment options for the security it offers. The returns of a fixed deposit plan do not change with a change in the social, economic, or political environment of the country. Once the fixed deposit interest rate is decided by the bank, it remains unchanged for the entire FD tenure. The fixed deposit minimum amount is low enough to accommodate even small investors. 

Recurring Deposit Explanation

A recurring deposit is a term deposit, where the investor does not have to deposit a lump sum amount at the start of the recurring deposit account. He must deposit an amount of his choice at regular intervals throughout the life of the recurring deposit. The amount they deposit in the recurring deposit account keeps getting accumulated over the life of the RD account till maturity. Additionally, it accrues interest returns from the bank for the entire duration. When the recurring deposit matures, the depositor can use the principal and interest amount to meet their financial goals. 

A recurring deposit is a wonderful way of encouraging even small investors to develop a habit of saving. Individuals like homemakers, college students, businessmen, etc., who cannot afford to spare a lump sum amount to invest in a single shot can opt for a recurring deposit. Here, they must deposit a small amount that they can keep aside from their monthly budget every month. Over the years, these small monthly amounts accumulate along with interest returns to create a substantial balance for the investor. 

Difference Between Fixed Deposit and Recurring Deposit

Let us now understand the difference between fixed deposit and recurring deposit schemes. 

  • Nature of investment: Fixed deposits are a one-time investment scheme. The investor must invest an amount of their choice to start a fixed deposit account. The bank pays regular interest on the FD scheme till it matures. Recurring deposits are schemes where the investor deposits a fixed amount at regular time intervals for the entire RD tenure. 
  • Tenure of investment: The tenure of a fixed deposit varies between seven days to 20 years, while the tenure of a recurring deposit ranges between six months to 20 years. 
  • Minimum deposit: The minimum deposit amount for an FD is Rs.1,000 or Rs.10,000, depending on the bank’s policies. On the other hand, the minimum amount for an RD is Rs.100. 

FDs and RDs are both good investment options and offer stable interest returns to investors. An investor can choose between the two options depending on his budget and investing needs. 

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