Recurring Deposit vs Fixed Deposit: Which Should You Choose and Why?
A Fixed Deposit is a financial product where you invest a sum of money with a financial institution or bank for a chosen tenor to earn a fixed interest and receive your invested principal at maturity. Recurring deposits, on the other hand, involve investing recurring sums of money on a monthly basis and gaining interest. There are numerous benefits that both options have; however, you should ask yourself a few questions before choosing one over the other.
Questions To Consider Before You Choose Between FD and RD
- Do you want the stability of income?
- Do you have the income to invest on a monthly basis?
- What kind of a tenor are you looking for?
- What interest rates are you expecting?
- Do you seek tax benefits?
Asking yourself these questions can help provide you better clarity in the FD vs RD debate.
Similarities and Differences between FDs and RDs
Before we study their difference, let’s have a look at their similarities:
- Both Fixed deposits and recurring deposits offer safe and risk-free investments, which are popular amongst most investors looking to save money for retirement as well as during their working life.
- Both these options offer you numerous benefits like steady returns, attractive interest rates, nomination facilities and loans against the investment, and both schemes are easy to sign up for as they are offered by numerous lenders and financial institutions.
- Fixed deposits and recurring deposits also feature tax exemption on interest earned up to Rs.10,000 per year and are taxed as per your income slab above this figure.
- Both fixed deposits and recurring deposits allow the investor to withdraw the sum after the end of the tenor. However, premature withdrawal is penalized in both cases.
- Fixed deposits and recurring deposits both need you to submit ID proofs and address proofs like Aadhar card, pan card and more before your accounts can be started. They also involve carrying out the usual formalities like filling an application form, viewing terms and conditions and more.
Here is How Fixed Deposits Differ From Recurring Deposits:
- Lump Sum vs Periodic Investment: A Fixed Deposit is best suited for those who have accumulated a sum of money as savings, and want to invest it for a short term. A recurring deposit, on the other hand, is best for those who can invest a smaller amount every month.
- Tenor: This is the amount of time that takes for the deposit to grow and mature. The tenor for traditional Fixed Deposits range from 7 days to 10 years, and the tenor for recurring deposits range from 1 year to 10 years. Also, FDs are a one-time investment, whereas recurring deposits need continuous investment, just like the name suggests.
- Rate of Interest: Interest rates for FDs and recurring deposits only vary with the amount invested and the scheme selected. The more you invest in an FD at one time, the more it grows and matures. However, the overall maturity of an RD remains unaffected by the numbers of times you successively make a deposit. Usually, FDs offer more interest than RDs.
- Maximum Investment: These are the limits that financial institutions and lenders put on deposits. The usual maximum limit for FDs is Rs.1.5 lakh; however, this can vary amongst lenders. For RDs, the maximum can usually go up to Rs.15 lakh.
- Returns: These refers to the interest that your investment earns over a given tenor. For FDs, the interest returns range from 6.96% to 8%. For recurring deposits, the interest rates over a tenor of a year vary from 5.25% to 7.90%.
Thus, you can see that both recurring deposits and FDs come with their own benefits that can be ideal for you depending on your requirements. If you are looking to inculcate the saving habit, and would like to invest a small amount from your monthly income, an RD is best for you. But if you have accumulated savings and need a safe way to make your money grow, choose an FD.
Bajaj Finance offers you profitable FD investment schemes to secure the future of your family.