If you are looking for safe investments to meet your short-term and long-term financial goals, fixed deposits (FDs) and recurring deposits (RDs) are the options for you.
Fixed Deposit
Fixed Deposit is a fixed-income investment offered by banks and NBFCs whereby investors deposit a certain amount to earn fixed interest with the persuasion of not withdrawing it until its maturity.
Recurring Deposit
Recurring Deposit is a fixed-income investment in which you need to deposit a fixed amount as saving regularly on a monthly basis to earn the interest applicable.
So, if you have accumulated corpus, you can invest in fixed deposits. If you want to accumulate a corpus, you can set aside a fixed amount in a recurring deposit. Both are safe and easy-to-operate ways to invest. However, there are several differences between the two.
Difference between RD and FD
Manner of depositing funds
In an FD account, depositors deposit a lump sum amount for a fixed period whereas an RD depositor deposits a fixed amount monthly for a specified period.
Deposit Tenor
You can open an FD account for 7 days – 10 years whereas an RD account can be open for 6 months – 10 years. Tenor options vary from institution to institution.
Interest pay-outs
FD owners can opt for monthly or quarterly or half-yearly pay-outs with non-cumulative FDs. Whereas an RD owner is not provided with this benefit. A monthly or quarterly interest payout option is not available for RD accounts. Post office savings interest rates are 4% on savings accounts and 5.8% for 5-Year Recurring Deposit Accounts (RD).
Auto-renewal
Fixed deposit account holders can renew their FDs. In case, depositors forget to withdraw their FDs on maturity, their FDs will renew automatically. Auto-renewal is not applicable to RD accounts.
Penalties
In the case of RD, if depositors delay the installment, a penalty over the Benchmark Prime Lending Rate will be levied on them. Make sure you pay the RD installment on time to avoid penalties.
Whereas, if an FD account holder withdraws the money invested in his FD account, he is liable to pay a penalty fee. The interest rates will decrease by 1%-3% as a penalty.
Tax benefits
There are tax-saving FDs through which investors can reduce the tax to be paid. Depositors can avail of tax exemption up to Rs.1,50,000 u/s 80C, Income Tax Act 1996. Whereas such an option is not available for RDs.
Therefore, both types of deposit accounts have different features for storing idle money and reaping monetary rewards but both are ideal for risk-averse investors. You can decide on a mix of both these types on the basis of your future goals. A steady stream of income and a growth factor both are required.