“A penny saved is a penny earned”, but what if the penny is able to grow. Saving money is always the need of the hour but it is also dead money which you are saving for a rainy day. Saving money and increasing it, are two different things. In today’s’ time you need to increase your money. Investment options carry high risk and rocky behaviour. If you are not a risk taker, deposit schemes are the safest bet for you. Fixed deposits and recurring deposits offer confirmed and steady growth of your money and spare you the horror of market fluctuations.
It is a one-time fixed investment that holds true for tenure of as low as 7 days and up to 10 years. There is no cap on the maximum amount that you can make a fixed deposit of but some banks do have a minimum deposit amount. The interest is compounded quarterly. The interest is credited to the customers’ Savings bank account or sent to them by cheque, which is a Simple FD. The customer may choose to have the interest reinvested in the FD account and that is called a Cumulative FD or compound interest FD. For such deposits, the interest is paid along with the principal amount on maturity. You cannot add any amount to your fixed deposit in midterm. You do have the option of withdrawing the amount midterm but that comes with penalty. Rate of interest depends upon the amount and tenure of the deposit made and currently the interest rate varies from 7.75% to 8.75%. The interest earned on fixed deposits is taxed as per one’s income tax slab on maturity. If the interest amount exceeds ₹ 10,000, the bank would deduct tax at source (TDS) at the rate of 10% p.a. Customers can avail loans against FDs up to 80 to 90% of the value of deposits. The rate of interest on the loan could be 1-2% over the rate offered on the deposit.
It is a regular monthly investment. Recurring deposit accounts can be opened for a minimum of 6 months, and a maximum of 10 years. The minimum limit for a recurring deposit varies with bank to bank (mostly in multiples of ₹ 100) and maximum limit is ₹ 15 lacs. All the deposits are to be made at a fixed date every month, any delay in instalments calls for a penalty. Most banks that offer Recurring Deposit usually compound interest on a quarterly basis. Premature and partial withdrawals are possible but come with 1 or 2% penalty charges as per the bank. Partial payment is not allowed nor can you pay more than the decided amount. Here, also the interest rate depends on the amount of monthly installment and maturity period and varies from 7.5% to 8.5%. Income on recurring deposits is taxed as per the depositors tax slab. If interest earned on recurring deposits exceeds ₹ 10,000 a year, TDS at the rate of 10% p.a. would be deducted by the bank. One can avail loans against the collateral of recurring deposit up to 80 to 90% of the deposit value.
Which is better?
Fixed deposit schemes earn you more income at maturity than recurring deposits. The primary reason for this difference is that for the same tenure, in a fixed deposit you invest a lump sum amount and so the entire money earns interest for one year. But in a recurring deposit the first installment earns interest for 12 months period, the second for 11 months, third for 10 months and so on. Due to this variation FD is able to fetch a higher amount at maturity.
What you should choose?
If you have a big amount sitting idle in your bank account which sees no use in the near future then invest that money in a fixed deposit for the desired time period. The motive of a fixed deposit is to get you higher returns than your savings bank account when you have lump sum money which is required nowhere.
If you do not have enough savings and are struggling with monthly salary and expenses then recurring deposits are the smart way to invest. Recurring deposits put you into a regular habit of making fixed monthly savings and disciplines you while spending your money.
The choice between fixed deposits and recurring deposits totally depend on the availability of money and your need of the hour. No matter what you choose but go through all the terms and conditions of the bank product before giving it a green signal.