Recurring Deposits and Fixed Deposits

In this article I will talk about the 7 key differences between recurring deposits and fixed deposits.

A Fixed Deposit or FD is a financial instrument through which a person (the investor):
1. gives money to a bank for a certain period;
2. receives interest;
3. gets his money back at the end of the period.

Fixed deposits are considered to be very safe investments. They are offered by national banks, private banks and companies.

In a recurring deposit a person invests a fixed amount every month for a specified duration. At the end, he gets back his investment and interest accrued. A recurring deposit earns interest at same rates as a fixed deposit. Money invested in a recurring deposit account earns compound interest on a quarterly basis. Interest is paid only on maturity.

#1 Recurring Deposits and Fixed Deposits – Product Structure

Fixed deposit is a single investment product whereas recurring deposit is a periodic investment product.

If you have Rs 60,000 that you would like to invest for a year, you can go for a fixed deposit.
If on the other hand, you can spare only Rs 5000 per month for 12 months, but still want to invest Rs 60,000, then you should go for a recurring deposit.

#2 Recurring Deposits and Fixed Deposits – Investible Amount

When one has a lot of idle cash and is looking for a safe investment option, fixed deposit is the best option. When one has small monthly savings and is looking to invest in safe investment option, recurring deposit is the best choice.

#3 Recurring Deposits and Fixed Deposits – Interest Income

At the same interest rate, a fixed deposit of Rs 600,000 (Rs 6 lakhs) will earn more interest than a recurring deposit of Rs 10,000 per month for 5 years.

A fixed deposit of Rs 600,000 will compound quarterly every year for 5 years, and earns a higher interest on interest. Thus the entire money earns interest for the full duration.

A recurring deposit is like multiple staggered fixed deposits of decreasing tenor.

  • The first investment of Rs 10,000 will earn interest for 60 months.
  • The second investment of Rs 10,000 will earn interest for 59 months.
  • And so on.
  • The second last investment of Rs 10,000 will earn interest for only 2 month.

In a Recurring Deposit only the amount invested till date earns interest for the remaining duration.

#4 Recurring Deposits and Fixed Deposits – Investment Goals

Recurring deposits are very useful if you have ultra-short to short-term goals (6 months to 3 years). Suppose you want to buy a mobile phone for Rs 24,000 in next few months but you do not have the money right now. You can start a recurring deposit of 6 months for Rs 4000 per month. Once the money accumulates in 6 months, you can withdraw the money and buy your phone.

Fixed deposits are more suited to long term longs (3-5 years). If have disposable cash and are saving for your daughter’s education needs or son’s marriage in 5 years time, fixed deposit is a very useful option.

#5 Recurring Deposits and Fixed Deposits – Liquidity Needs

When you invest in a Fixed Deposit for 5 years, you money is effectively locked for 5 years. If some emergency arises, you will not be able to able to use this money without breaking your Fixed Deposit and paying a penalty. With a recurring deposit, you will always have more disposable liquidity in your hand and if an emergency arises, you can use that money.

#6 Recurring Deposits and Fixed Deposits – Tax Saving

Certain long-term Fixed deposits (5 years) of scheduled banks are eligible for tax benefits upto RS 150,000 under Section 80C. No such tax benefits are available for recurring deposits.

#7 Recurring Deposits and Fixed Deposits – Investor Type

If you have joined a job recently and earning less or if your expenses are high, recurring deposits are the ideal option for you. They will earn more than savings account and will also create a sensible investment habit. If you are someone who earns a lot or is able to save a lot, fixed deposit would be a better choice for you.

Final Words

Both recurring deposits and fixed deposits are fixed income products available in India. Both recurring deposits and fixed deposits have same tax rules in terms of TDS (tax deducted at source) as well as normal taxation. These are safe products and a good investment option for risk averse people.

However there are certain differences between recurring deposits and fixed deposits. The major difference between recurring deposits and fixed deposits is the structuring of the products; fixed deposit is a single investment product whereas recurring deposit is a periodic investment product. This will determine which product to choose based on one’s monthly disposable income, liquidity needs and goals.

I hope you found this article on differences between recurring deposits and fixed deposits useful. If you have any comments, please feel free to contact me.

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REFERENCES

Yahoo – Fixed Deposit versus Recurring Deposit
Hindu Business Line – FD scores over RD

Before making any investment decision, please contact your financial adviser. I have provided this article “Recurring Deposits and Fixed Deposits” for educational purpose only.

Subhodeep Mukhopadhyay

I am a Management Consultant in the Education Sector. In my previous corporate career, I have worked in Banking, Private Equity and Software industry. I am an MBA in Finance/ Computer Engineer and enjoy doing equity research and financial analysis in my free time.

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