Which is better Fixed Deposit versus Recurring Deposit
The wealth generation involves adhering to strict discipline. Capital must be systematically put aside to grow over some time. Every way of investing comes with its collection of features and rewards, whether you choose to invest in the stock market, commodity market, mutual funds or even opt for conservative investment strategies, such as fixed and recurring deposits. In the form of a recurring deposit, most individuals begin with small monthly deposits, which they turn into a fixed deposit upon maturity.
In this writeup, we will compare these safe and secure methods and illustrate in details about these investment methods.
What is a Fixed Deposit investment scheme?
Fixed Deposits (FDs) are a type of investment plan that banks, post offices, and even businesses provide. FDs are usually accepted as one of the safest modes of investing. As opposed to savings accounts, fixed deposits are also considered to achieve firm and assured returns and set high-interest rates. Fixed deposits have become an excellent route for those finding ways to access low-risk guaranteed corpus. They are a one-time deposit form of investment.
The two most common type of FDs are:-
- Bank FD: Either private banks or state banks offer bank FDs. For their fixed deposit plans, banks usually dictate the terms and conditions. For those clients who have established a savings account with them, banks can provide some supplementary deals. It is understood that bank FDs have lower levels of liquidity.
- Corporate FD: Businesses or firms offer corporate FDs. Corporates typically use ratings carried out by independent credit reporting organisations such as ICRA, CRISIL, CARE, and others. In some sections, such as selecting tenure or terms of maturity, corporate fixed deposits are considered to be more flexible.
What is a Recurring Deposit investment plan?
Recurring deposit (RD) is a common investment choice in India, among the low-risk investment tools with moderate and guaranteed returns. In the preference of investment amount and term, it is flexible for clients followed by several other advantages. This investment tool provided by multiple banks and NBFCs helps channel monthly savings for long or short-term corpus formation, available in flexible terms ranging from 6 months to 10 years (varies from bank to bank).
Investors can, therefore select a minimum sum for guaranteed wealth creation to be spent per month over the period. If you do not have a lump sum to fulfil short-term targets, the intention is well served by depositing a small share of your earnings into the RD account each month.
FD vs RD? What are the key differences?
The objective of the deposit
Investors put their idle funds away in an FD and gain a particular interest rate that is higher than the interest earned while the money is in the savings account. On the other hand, RDs allow one to introduce a disciplined habit of saving each month a fixed amount of money.
Term of the deposit
An FD may be opened for a minimum time of 7 days, with a maximum duration of nearly ten years. Whereas in the case of RD, the minimum term is six months and the maximum tenure is ten years.
Renewals and withdrawals
In fixed deposits, depositors have the option of rolling over a deposit for another term, which may vary from the original period selected. After maturity, the bank will auto-renew the deposit in case you do not withdraw. The interest rate could be lower, higher or the same, based on the prevailing interest rate provided by the bank. However, you have to pay a specific penalty if you want to cancel the deposit before the maturity date. Concerning renewals and withdrawals of RDs, before the selected term, one can close an RD investment and reinvest it in a term deposit; the account holder will still earn an interest rate, with a penalty reduction of 1 percent. Besides, it is not possible to make partial withdrawals in recurring deposits. Like FDs, you can take a loan against your RD instead of splitting the deposit and withdrawing the cash if you need funds desperately.
Both FDs and RDs are taxable, i.e. interest earned is taxable on both investment plans. In the case of RD, it is not mandatory to pay TDS, but interest received must be reported at the time of filing the income tax return by the person. If the interest received on the balance of the fixed deposit is more than ₹ 10,000 the account holder will have to pay TDS. From April 1, 2019, this limit has been updated to ₹ 40,000. If the PAN is presented, the TDS payable is 10%, if not, then 20 %TDS is liable.
So, what should you choose between FD vs RD?
Instead of an FD, people who do not have a large amount of capital to spend but can afford a small amount of investment per month can go with a recurring deposit. Deposits are made every month, and at the end of the RD tenure, the cumulative balance or the maturity amount will be added to your related savings or current account.
But, if you have to invest a lump sum at once, the fixed deposit is the best savings option for you. As the principal will be more significant right from the start, you will be able to earn more interest.
Often, you can look for a cumulative FD to get decent returns. Here, the interest received in one period will not be added to your associated account (per month, per year, semi-annually or annually) but will be reinvested with the original deposit. This will raise the principal, and the interest on a higher principal will be calculated in the next period offering you higher returns.
RDs and FDs are both safe and risk-free investment plans. You will receive better returns in FD investments than a recurring deposit. However, some people choose RDs over FDs as they do not have large amounts for such one-time investment. Therefore, we suggest you pick the investment plan (if it comes to choose between FD vs RD) according to your affordability and convenience.