When it comes to saving money securely, Fixed Deposits (FDs) and Recurring Deposits (RDs) are two popular choices among investors. Both offer guaranteed returns and are considered low-risk investment options. However, they cater to different financial needs and saving habits. Understanding the key points of difference between an FD and an RD can help you make an informed decision that suits your financial goals and needs.
Before we dive into the difference between an FD and an RD, let’s understand each one in some detail.
What is a Fixed Deposit?
A fixed deposit is a financial instrument provided by banks and financial institutions. An FD allows you to deposit a lump sum amount in an FD account, which earns interest at a predetermined rate for a fixed tenure. The interest rate can be higher than that of a regular savings account. This makes it an attractive option for those looking to earn more on their idle funds. The tenure can range from 7 days to 10 years, depending on the bank's offerings. Banks offer different types of FDs to help suit the varying needs of investors.
Types of Fixed Deposits
Let’s look at the different types of fixed deposits so that you can choose the one that best suits your needs:
Standard Fixed Deposit
This is a regular FD where a lump sum is deposited for a fixed tenure at a pre-decided interest rate.
Cumulative Fixed Deposit
In this FD, the interest is compounded and paid at maturity. It can be ideal for those who do not need periodic interest payouts.
Non-Cumulative Fixed Deposit
Here, the interest is paid out at regular intervals (such as monthly, quarterly, or yearly). It can be suitable for those seeking a regular income.
Tax-Saving Fixed Deposit
A tax-saving fixed deposit has a lock-in period of five years and offers tax deductions under Section 80C.
Senior Citizen Fixed Deposit
These types of fixed deposits offer higher interest rates for individuals above 60 years of age.
Flexible Fixed Deposits
They combine the features of savings and FD accounts, wherein excess funds from the savings account are transferred into an FD and earn FD-like interest rates. The funds can be withdrawn as and when required.
Benefits of Fixed Deposits
Adding an FD to your savings or investment plans can be beneficial for several reasons.
Predictable Returns
FDs offer a fixed interest rate, which means you get predictable returns at the end of the tenure. You can use an FD calculator to get an estimate of the returns.
Low Risk
As FDs are unaffected by market fluctuations, they are considered a safe investment. Your returns are assured as per the interest rate set by the bank.
Flexible Tenure
FDs allow you to choose a tenure that aligns with your financial goals. A short tenure can be suitable for a short-term goal, while a long tenure, like 5-7 years, can be ideal for the long haul. An FD calculator can also help you choose the right tenure by giving you an estimate of the returns for the same investment amount but with different tenures.
Loan Facility
When comparing an FD vs RD, it can be helpful to remember that many banks offer loans against FDs. As the money is invested in a lump sum, it can be used as collateral against a loan to enjoy favourable interest rates.
Tax Benefits**
Certain FDs, like tax-saving fixed deposits, offer tax deductions under Section 80C of the Income Tax Act.
Now that you know the benefits and different types of FDs, let’s take a look at recurring deposits.
What is a Recurring Deposit?
A recurring deposit is a financial instrument that allows individuals to deposit a fixed amount every month into their RD account and earn interest at the applicable rate. It is ideal for people who want to create a regular saving habit with small amounts of money. The tenure for an RD can range from around 6 months to 10 years. RDs do not come in a variety, except for senior citizen RDs where the interest offered is slightly higher.
Benefits of Recurring Deposits
When comparing a fixed deposit vs a recurring deposit, you should consider the following benefits of RDs:
Disciplined Way of Saving
An RD can encourage a regular savings habit since it requires fixed monthly deposits.
Affordable
RDs are suitable for individuals who cannot invest a lump sum but can save small amounts regularly.
Guaranteed Returns
While there are many points of difference between an FD and an RD, one of the similarities they share is that both offer fixed interest rates. This enables you to enjoy predictable returns at maturity.
Flexible Tenure
Another point of similarity between FDs and RDs is that the latter also allows you to choose a tenure of your choice. You can use an RD calculator to get a clear idea of which tenure will be suitable for your goals.
Difference Between Fixed Deposits and Recurring Deposits
Here are the key points to keep in mind when comparing an FD vs RD for your savings plans:
Feature
| Fixed Deposit (FD)
| Recurring Deposit (RD)
|
Investment Mode
| Lump sum investment at the beginning of the tenure.
| Regular monthly investments over the chosen tenure.
|
Tenure
| Ranges from 7 days to 10 years.
| Can range from around 6 months to 10 years.
|
Interest Rates
| Generally higher interest rates as compared to RDs.
| Slightly lower interest rates than FDs.
|
Returns
| Interest is calculated on the entire lump sum amount.
| Interest is calculated on the monthly deposits, which may lead to slightly lower returns. An RD calculator can help estimate the same.
|
Liquidity
| Premature withdrawal is possible, often with a penalty.
| Premature withdrawal is possible but may attract penalties.
|
Suitability
| Ideal for individuals with a lump sum amount to invest.
| Best for individuals who prefer to save a fixed amount regularly.
|
Tax Benefits
| Tax-saving FDs offer deductions under Section 80C.**
| Generally, RDs do not offer tax benefits.
|
Loan Facility
| Loans can be availed against the FD amount.
| Banks rarely offer loans against RD funds.
|
The difference between FDs & RDs lies mainly in the investment mode and the interest offered. While FDs are suitable for those with a lump sum to invest, RDs are ideal for individuals who prefer to save regularly. It is advisable to assess your present financial needs and future goals before adding an RD or an FD to your investment plans.
** Tax exemptions are as per applicable tax laws from time to time.
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