Fixed deposits and recurring deposits have been a popular investment choice for decades, as the returns they provide are significantly higher than savings accounts. This is one of the reasons why people opt for these investment schemes when it comes to growing their savings. It is a better route than letting the money stagnate with low-interest rates in savings accounts.
When it comes to choosing between fixed deposits and recurring deposits, there are several factors that come into play — factors that make them suitable for the different needs of different people.
However, there is one defining feature that binds these two types of accounts, and that is the financial security that comes in it. The money which you invest in FD and RD accounts are free of market-related fluctuations, which means that your money is safe. This is one of the reasons why this type of savings scheme still holds popularity over other forms of investment, such as shares, stock bonds, mutual funds, and more.
Here, we will go into more details about these two types of accounts and define their features, so that choosing between them becomes easier.
A fixed deposit is a financial instrument through which you can invest a fixed sum of money over a period and earn interest on it. There are two types of FD accounts that you can invest in.
The non-cumulative fixed deposit plan is quite traditional with how it operates. Here, your principal amount is invested for a tenure which you choose, and then interest is paid back to you on a monthly, quarterly, or yearly basis. It is an excellent option for those who want to have a regular income source as the principal amount stays invested for the tenure, but the interests are paid out at regular intervals.
Cumulative fixed deposit accounts put compound interest into use. In this scheme, your principal amount is invested for the tenure which you choose while creating an account. The interest earned on it is then compounded quarterly and then reinvested alongside your principal amount. The amount which is accumulated — the principal amount and the accrued interest — is then paid out when the fixed deposit policy attains maturity.
Both cumulative and non-cumulative plans work for individual needs under different circumstances. If you are someone who would like a regular payout of interest, then a cumulative FD plan is a good option. Otherwise, it’s the non-cumulative plan that you should go for.
Recurring deposits (RDs) brings the discipline of saving. Under this scheme, you have to set aside some amount every month for depositing in the account. When the policy hits maturity — at the time when your chosen tenure is completed — you are paid the accumulated deposit amount with interest.
RDs do not require a major investment sum, and some banks and financial institutions allow you to start investing and saving with an amount as low as Rs 10.
Being two popular investment options, fixed deposits and recurring deposits fulfill different needs in different situations. Here, let’s look at some of the distinguishing factors between them.
With fixed deposit accounts, the interest varies with the type and term of the FD. Generally, you have the option to invest for a period between seven days to 10 years. Fixed deposits available on Finserv MARKETS have tenure ranging from 12 months to 5 years. from Recurring deposits, on the other hand, can be opened for a period between six months and ten years.
The rule of thumb here is that deposits made for a more extended period have a better rate of interest than the ones that are made for a short term.
Both RDs and FDs are popular financial instruments for saving money and accumulating interest on it. Both of these account options are safe as they provide guaranteed returns on the investment.
The primary distinction between the two when it comes to the purpose of the deposit is that FDs make a good gateway for idle cash, whereas RDs need you to repost a predetermined sum every month.
The interest rate on both fixed deposits and recurring deposits vary with banks and financial institutions. The minimum deposit amount also varies. Fixed deposits on Finserv MARKETS come with an attractive rate of interest of 8.95%.
There are specific RD schemes for students and senior citizens, with customized rates of interest that fit their situation better. However, for the same principal amount and period, the interest rate on fixed deposits is higher than that of recurring deposits. This is because in fixed deposits, the entire amount earns interest every month. In the case of a recurring deposit account, the first installment which you pay is liable to earn interest for the complete tenure, and the rest of the installments earn interest as they are deposited.
In case of a fixed deposit account, you have the option to partially withdraw your money after paying a small penalty, usually 2 percent of the principal amount.
On the other hand, there are no options for partial withdrawals when it comes to recurring deposits.
If you decide to foreclose your policy, then you can do so after paying a penalty.
The interest that you earn on recurring deposits and fixed deposits is taxable. If the interest you earn in a single financial year on your fixed deposit exceeds Rs 10,000, then the bank is liable to deduct 10 percent as Tax Deducted at Source (TDS). If you have not submitted your PAN card information, then you will be charged at 20 percent.
For RDs, TDS is not deducted. However, you will have to file it in your income tax returns.
Both of these investment instruments appeal to a broad class of investors. However, they are more popular among people falling in lower tax slab. FDs and RDs are a great addition to your investment portfolio since they help you accumulate savings for short term or long term goals, and can help you meet certain financial milestones that you might have set for yourself in the future.