Fixed Deposits (FDs) and Recurring Deposits (RDs) are two popular options among investors for a safe and reliable investment. FDs are for lump sum investment whereas RDs are for regular investments. They both potentially provide fixed returns but have differences in terms of investment style, flexibility, and suitability. This article explores the key differences between FDs and RDs to help you make an informed decision.
What are Recurring Deposits?
A recurring deposit is a savings scheme that allows you to deposit a fixed small amount regularly every month for a specified period. It is a suitable option for people who are looking to save gradually and earn interest. In an RD, you deposit a fixed amount every month with quarterly compounded interest. You can even use a recurring deposit calculator to estimate your maturity amount easily.
What are Fixed Deposits?
Fixed deposit is a savings scheme where you deposit a lump sum amount with a bank or financial institution for a fixed period at a predetermined interest rate. The amount earns interest over time, and you receive the principal along with the accumulated interest at the end of the tenure. It’s a low-risk investment option suitable for those seeking fixed returns.
Key Differences Between Fixed and Recurring Deposits
Fixed Deposits (FDs) and Recurring Deposits (RDs) differ mainly in how the capital is invested and the purpose they serve.
Investment Type
Fixed Deposits (FDs) require you to invest a lump sum amount in one go at the beginning of the period. This is mostly suitable for individuals who have a surplus of funds and want to earn steady returns without making additional contributions. On the other hand, Recurring Deposits (RDs) are designed for regular savers, where you deposit a fixed amount every month over a specified period.
Tenure Flexibility
Fixed Deposits (FDs) offer a wide range of tenure options, typically starting from as short as 7 days to as long as 10 years. This allows investors to choose a duration that aligns with their short-term or long-term financial goals. Whereas RDs also offer flexible durations and usually have a minimum tenure starting from 6 months. The maximum period can go up to 10 years, depending on the bank’s policy.
Interest Calculation
Both Fixed Deposits and Recurring Deposits usually follow quarterly compounding of interest. However, since FDs involve a lump sum invested from day one, the entire amount earns interest for the full tenure. In contrast, RDs involve monthly contributions, so each deposit earns interest for a shorter period. As a result, the total interest earned in RDs is typically a bit lower than that of FDs with the same tenure and interest rate.
Returns
FDs offer fixed returns that are known at the time of investment. RDs also offer fixed returns, but since the investment is made gradually, the final maturity amount is typically lower than an FD of the same total investment.
Premature Withdrawal
Both Fixed Deposits (FDs) and Recurring Deposits (RDs) offer the option of premature withdrawal, meaning you can access your funds before the completion of the chosen tenure. However, this convenience usually comes with certain conditions. In most cases, withdrawing funds early from either scheme may lead to a reduction in the interest earned or a penalty charge imposed by the bank.
Saving Discipline
FDs are suitable for locking in a lump sum amount and earning stable returns. RDs encourage disciplined, monthly savings, making them a good option for salaried individuals or those looking to build a habit of saving.
Minimum Investment Requirement
The initial amount required to open a Fixed Deposit (FD) is generally higher compared to a Recurring Deposit (RD). FDs typically demand a lump sum payment at the time of opening the account, and this minimum amount can vary from bank to bank. It often starts from ₹1,000 and goes up depending on the type of FD and the institution’s policies.
In contrast, RDs are designed to encourage regular savings with a much lower monthly contribution. Most banks allow you to start an RD with a small fixed amount every month sometimes as low as ₹500 or even ₹100 in some cases. This makes RDs more accessible, for salaried individuals.
Interest Payout Options
FDs offer flexible interest payout options such as monthly, quarterly, or at maturity based on the investor’s preference. This suits those who want a regular income or prefer reinvestment. You can also use an online fixed deposit calculator to estimate your returns based on the chosen payout frequency. In contrast, RDs pay interest only at the time of maturity, making them suitable for long-term savers who don’t need periodic returns.
Conclusion
Both Fixed Deposits (FDs) and Recurring Deposits (RDs) offer secure and predictable ways to potentially grow your savings. The choice between the two depends on your financial goals, cash flow, and saving habits. If you have a lump sum amount and prefer earning stable returns with flexible interest payout options, FDs may be the right fit. On the other hand, if you’re looking to build savings gradually with small monthly contributions, RDs can help you develop financial discipline. By understanding the key differences and using tools like an online FD or RD calculator, you can make a more informed decision that aligns with your investment needs.