Recurring Deposit - Why Invest?

Recurring Deposit can be described as an investment that is risk averse and gives guaranteed returns especially if you have short term investment goals.

It is suitable for short term goals that involve a time span of 1 to 3 years and it is the right financial product if you are planning to tackle short term situations that require immediate financial assistance.

They are also a financial product where one can not only invest but at the same time generate a regular monthly income.

 It is similar to other forms of investment with the only difference being that here we invest small amounts every month in a very systematic way.

The amounts are like fixed deposits in that they are taxable, which does not make them a very attractive investment option for tax purposes.

You can invest in them if you want to save for regular purposes, but for tax purposes this is not a good investment.

One needs to compare the interest rates before you invest, as these have undergone a lot of changes in recent times.

 Interest rates on recurring deposits are fully taxable though it still considered one of the best and the safest forms of investment in India.

You will be required to deposit a fixed amount every month for a select tenure and the amount will earn interest.

The effectiveness of the investing in such schemes depends on its features and ability to meet the investors objectives and financial goals.

Recurring Deposit can be viewed as a better investment as it does not involve market risk and you are assured a guaranteed return on investment.

The interest Rates offered by banks for recurring deposits depending on the principal amount and tenure of the deposit.

You will find most banks offering these products through Net Banking and investors can make a deposit online without any hassles.

Flexible recurring deposit schemes allow deposits of any amount at any time and one can make a deposit a small amount every month and one does not need to invest a lump sum to start a recurring deposit.

Interest Rates are low when compared to other forms of investment and customers get an interest rate that varies for Recurring deposits.

Recurring deposits give guaranteed but low returns when compared to other popular investment schemes like Mutual Funds and SIPs.

In case of withdrawals from a recurring deposit account before the end of tenure there is a penalty and instant withdrawals may not be possible in case of a financial emergency.

In case the RD is not flexible, the customer will not be able to change the monthly investment amount.

The customer can deposit money in a recurring deposit account, close the account, update information, view transactions, deposit details and do much more online. 

It is about making an investment and earning interest without even having to leave your home while investing in a recurring deposit.

Interest rates depend on the tenure and deposit amount and in most cases, the recurring deposit interest rate is very similar to that of fixed deposits.

 Interest rates vary  depending on the bank and the plan chosen by the customer. 

Also, many banks offer higher interest rates for senior citizens and can also use a RD calculator to find how much interest you will accumulate for the deposit amount, interest rate and tenure.

If you are a salaried employee you can set aside a particular amount every month as savings and for this recurring deposit is the best option. 

Also, RD schemes come with guaranteed returns and the rate of interest for RD is locked in which will protect the investor from changes in the interest rate.

Some banks offer flexible Recurring Deposit schemes where the investor will not be penalized if the amount is not deposited during a particular month. 

Also, in a flexible RD scheme, you will be able to withdraw the amount from your RD account anytime you want

When you deposit the money in an RD, you will never have the privilege to withdraw any part of the money until the term of the deposit is over. 

Hence, if you are looking for an easy liquidity instrument, recurring deposits are not a good alternative but if you want to discipline your savings then this disadvantage may work to your benefit.

It must be noted that he interest rate that you earn on recurring deposit is much lower that regular fixed deposit schemes, since your deposits are being made in small installments and not as a lump sum amount.

It is not possible in the case of recurring deposits to be able to change your deposit amount, regardless of your financial situation at the moment. 

When you have a fixed amount for investment each month, then the chances of extra or less funds for the deposit should be discouraged from opting for this product.

Bank Fixed Deposits - How To Invest

Bank deposits are one of the most preferred investment options in India as they are known for being safe and not risky, especially in comparison with other investment option like the stock market and mutual funds.

A fixed deposit (FD) is a financial instrument provided by banks which gives investors a higher rate of interest than a regular savings account, until the given maturity date.

It may or may not require the opening of a separate account and are they are considered to be very safe investments with term deposits being used to denote a larger class of investments with varying levels of liquidity.

In a fixed deposit investment, the money cannot be withdrawn from the FD as compared to a demand deposit or recurring deposit before maturity.

Banks may offer additional services to FD holders such as loans against FD certificates at competitive interest rates.

 The banks may offer lesser interest rates under uncertain economic conditions that varies in percentage terms with the time period that can vary from the short term such as 7 days to a long term of 10 years.

These investments are safer than Post Office Schemes as they are covered by the law and that guarantees a specific amount per depositor per bank with income tax and wealth tax benefits.

 Those from reputed banks are a very safe investment because such banks are carefully regulated by the Reserve Bank of India, RBI, the banking regulator in India. 
 
It is important to note that company FD is not reliable as compared to a bank FD because if the company goes bankrupt you may lose your money.

 You need to check the credit rating of a company before investing and be careful of companies which offer interest rates that are significantly higher than the average to attract your money.

An FD gives you the option of receiving regular income through the interest payments that are made every month or quarter and this is especially useful for the retired.

It must be noted that a fixed deposit will not give you the same returns that you may get in the stock markets but the risks of investing in stocks are higher.

A fixed deposit is not helpful against inflation and if inflation rises steeply during the maturity of the FD your inflation adjusted return will fall. 

There are two types of term deposits - fixed deposits and recurring deposits.

A fixed deposit is where you invest all your money at one-go whereas a recurring deposit is when you invest your money in installments.

When you opt for a term deposit, you are placing your funds in a particular bank deposit for a fixed period of time and for this banks offer you to pay a fixed interest and makes it a safe alternative because the interest payment acts as your profit from the investment.

Senior citizens usually get a higher interest and while fixed deposits offer higher interest rates, recurring deposits usually offer a lower interest rate than fixed deposits.

You can decide when you want to receive the interest due once the deposit matures, you can opt for regular interest payments on quarterly, half-yearly or annual periods of time and some banks also offer you a choice to reinvest your interest payments.

Term deposits offer a wide variety of interest rates that changes with the duration of the deposit with the greater the duration, larger is the interest rate offered.

This makes investors deposit money for as longer a time as the bank pays interests regularly and over a period of time, this money can either be reinvested in the same deposit or saved in your bank account that would earn you additional interests, thus increasing your total return.

The money you deposit with the bank acts as a source of cheap borrowing for the bank but the money in the savings accounts could be withdrawn any moment by depositors.

This increases risks for the banks and that is why banks actively try to attract deposits to invest in term deposits because the amount in deposits are unlikely to be touched for a longer period of time.

The only rule of a term deposit is that once you deposit, you cannot withdraw this money and if you want to reclaim your deposit amount, you will be fined a particular sum or your total interest payment may be reduced.

Banks may only allow you to withdraw the money after a certain minimum period.

Breaking a fixed deposit means withdrawing the money before the maturity expires and this may be necessary if you urgently require the funds or if there are better investment opportunities elsewhere. 

If you are in need of liquid cash, and you have withdrawn all of your funds in your bank accounts, you can borrow on the basis of your fixed deposits and this is called the overdraft facility.

There is a limit to how much you can borrow under this service and it may not be interest-free.

Interest payments on fixed deposits are taxable and this depends on your overall income tax bracket to which you belong.

If you fall in the 20% income tax bracket, your interest payments would be taxed at the same rate and this is why fixed deposits are usually not preferred by those in the 30% bracket.

Also, if your total interest payment in a year exceeds Rs 10,000, then the bank cuts 10% as tax deducted at source (TDS).

However, if you submit the Form 15G/H to the bank stating you have no taxable income, then the bank will not deduct tax. 

You can also split your term deposits across banks to ensure the interest is not more than the amount of INR 10,000 in a single bank.

Banks offer fixed deposits for tax-saving purposes and the amount you save in such deposits can reduce your total taxable income and thus help you save taxes.

Tax-saving deposits have a minimum tenure of 5 years and a maximum of 10 years and the government has also kept the maximum amount you can invest in such a deposit for tax purposes to Rs 1 lakh per year but the interest you earn will be taxable.