Fixed Deposit and Recurring deposit are the two most preferred financial instruments for risk-averse investors. One of the greatest advantages of investing in these schemes is their fixed returns. Both schemes are very similar so many people struggle to decide if they should put their money in a Fixed Deposit or a recurring deposit.
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What is a Fixed deposit?
“To understand FD/RD (i.e. the difference between FD & RD), it is imperative to understand both of these investment instruments.
Fixed deposit is an investment option that allows for you to grow your money over time at a fixed rate. This scheme requires a one-time investment to begin the tenure. Fixed deposit tenures can range from 7 days to 10 years. The principal amount will be paid at maturity. However, you have the option to receive interest at regular intervals or at maturity.
Fixed deposit allows you to store your savings and experience significant wealth growth. Fixed deposit offers guaranteed returns and security because FD interest rates are constant.
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What is a Recurring deposit?
Customers can make recurring deposits and invest the amount they choose each month. This is the main difference between FD & RD.
Recurring deposits are offered by many banks with tenures ranging from 6 months to 10 year. The interest rates are fixed throughout the tenure. The principal is paid at maturity. You can also choose to receive interest at regular intervals, or at maturity.
Key Differences between FD and RD
Knowing the differences between a Fixed Deposit or a Recurring deposit is important. Before you invest, it is important to be clear about FD vs RD.
We have provided a guide to FD vs RD and the differences between these two types of term deposits.
- Investment Frequency
Fixed deposit accounts allow you to invest large amounts in one transaction. You can, however, invest a smaller amount at regular intervals with a recurring deposit. This is the difference between a basic FD and RD.
- Deposit Tenure
Fixed deposit accounts allow for a time period of 7 days to 10 year. Individuals have the option to choose the time frame. The timeframe for recurring deposit accounts is 6 months to 10 year. The individual cannot choose the investment timeframe. This is a major difference between FD or RD.
The difference in RD and FD interest amounts you earn at the end is called the investment tenure. This is more than for recurring deposits.
Fixed deposit accounts pay interest monthly, quarterly or upon the maturity of the plan. In a recurring deposit account however, interest is paid only to the person who has completed the plan.
Fixed deposits pay interest when you have a surplus amount. A recurring deposit allows you to save money by investing a set amount of time at a fixed rate for a specific time period.
- Default Clause
A fixed deposit account allows an individual to not miss payment due dates as the payment is made one-time. If an individual fails to pay the amount within 6 months of a recurring deposit, the bank can close the account.
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Common Features of FD & RD
You have already learned the differences between FD and RD in the previous section. We will now discuss the common characteristics that FD and RD share.
- Fixed Income Investments: Fixed deposit and recurring deposits are both fixed-income investments. These investments offer a guaranteed return at maturity. Before an individual invests their money, they are informed of the interest rate. The interest rate is fixed for the entire deposit period.
- Guaranteed Returns: You can calculate the returns for FD or RD even before you invest in them. Based on the tenure, amount and RD interest rates, you can calculate the maturity amount. This will help you to plan ahead for your financial goals.
- Premature Withdrawal However, you will have to pay the penalty. With subsequent withdrawals, the penalty amount could increase.
- Loan Facility: Fixed deposit and recurring deposits share a common feature. You can borrow against either one of them. You can use the withdrawn amount for any purpose. The loan amount can vary from one bank to the next.
Which should you choose?
You might now be wondering if you should make a regular or fixed deposit. This is how to make a decision.
Fixed deposits are a great option if you have substantial money that you can invest as a lump sum. Fixed deposits can offer higher interest rates than RD, so you will be able to earn more. You can also invest in cumulative FD where the interest compounded.
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If you have a large amount of income, such as Rs. Recurring deposits can be a great option if you have 1000 to invest each month. You can continue to deposit a fixed amount each month. Your account will receive the returns upon maturity.