Difference between Fixed and Recurring deposits
03 Jul 2019
Understanding the differences between fixed deposits and recurring deposits
The process of wealth creation requires discipline. Money must be put away systematically, over a period of time for wealth to grow. Whether you choose to invest in the stock market, commodities market, mutual funds or even opt for conservative methods of savings such as fixed deposits and recurring deposits; each way of savings comes with its own set of features and benefits. Most people begin with small monthly savings in the form of a recurring deposit, which they convert into a fixed deposit upon maturity. But this is just one way to go about it. In this article, we shall highlight the key differences between fixed deposit and recurring deposits. However, to do so, we need to understand what a fixed and a recurring deposit actually is.
Recurring deposit v/s fixed deposit
Fixed deposits or FDs (also so known as term deposits) refer to the financial instruments provided by banks through which one can lock away a sum of money for a specific duration and earn a monthly, quarterly, half-yearly, annual or cumulative interest at the end of the term. As the term ‘fixed’ suggests, one cannot withdraw money from a FD until the end of the term. Should you choose to ‘break’ your FD prematurely, you have to pay a penalty to the bank. A recurring deposit, on the other hand, refers to a disciplined way of putting away a fixed sum of money in an account every month. One needs to open a special recurring deposit account and can earn the same interest rate as offered on FDs. RDs are a great way to put away savings every month until a more substantial amount of money is accrued, which can then be put away as an FD.
FDs and RDs – key differences
Let us look at the main differences between FDs and RDS
The purpose of the deposit: Investors can put away their idle savings in an FD and earn a specific rate of interest, which is higher than the interest accrued when the money is sitting idle in the savings account. RDs, on the other hand, allow one to inculcate a disciplined habit of saving a fixed sum of money every month.
The duration of the deposit: You can open a fixed deposit for a minimum duration of 7 days, whereas the maximum duration of the deposit is about 10 years. On the other hand, the minimum duration for the RD is six months, whereas the maximum deposit tenure is 10 years.
Renewals and withdrawals: With regards to fixed deposits; one can roll over a deposit for another term, which may be different from the original term chosen. If you do not opt to withdraw an FD, the bank can auto-renew the deposit, but the interest rate may be lower, higher or the same; depending upon the prevailing rate of interest as offered by the bank. However, if you choose to withdraw the deposit before maturity, you have to pay a certain penalty. With regards to renewals and withdrawals of RDs, it is possible for one to close an RD before the chosen term and reinvest it into a term deposit; the account holder can earn an interest rate, with a 1% reduction as penalty. Also, it is not possible to make partial RD withdrawals. However, should you need money urgently; you can take a loan against your RD instead of breaking the deposit and withdrawing the cash.
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Benefits of Life Insurance
Life insurance is a must in today’s world. Modern living is an expensive business, and people have to bear the burden of huge costs like children’s education, EMIs on home loans, healthcare and so on. So it is important for every earning member to have a life insurance policy to protect the financial interests of his or her family. There are many benefits of life insurance policy, which we will look at in this article.
Features of life insurance
Let’s look at the features and advantages of life insurance policy:
Protection: The first and foremost objective of a life insurance policy is to ensure the financial protection of your family, and this could include dependent parents, spouse, children or siblings. The demise of the sole earning member could put dependents to considerable hardship, especially since cost of living is very high these days. Life insurance gives you the assurance that your family members will be looked after in the event of your untimely demise.
Contract: Life insurance is basically a contract between the insurers and the individual who takes out the policy. You pay premiums every quarterly/half yearly/yearly to the company. In return, the insurer will give a lump sum to your family in the event of your demise.
Premiums: Premiums are paid quarterly / half yearly which you need to pay to get life insurance. The amount will vary from person to person, depending on the tenure of the policy, age of the policyholder, health and type of policy.
Affordable: Life insurance is an affordable way of ensuring the financial well-being of your family. Premiums on policies, particularly term insurance, are quite low and worth your while for the protection they offer.
Easy to buy: Buying insurance from company is quite easy. Insurance companies have specified persons, who will visit you at your home or office and help you with options and paperwork. You can also do it online at your convenience.
Tax benefits: Another one of the benefits of life insurance policy is that you can deduct the premiums you have paid from your taxable income. Under Section 80C of the Income Tax Act.
Savings: There are some life insurance products that combine savings and insurance. This can be a good way of saving for the future and protecting your family at the same time
Types of life insurance
Now that we’ve seen the essential features of life insurance policy, let’s look at the types:
This is the most basic, and most popular, of life insurance policies. You purchase a policy for a certain period for which you pay premiums. For example, if a policyholder wants a policy till the age of 60, he or she can take one. And if the policyholder passes away before 60, the nominee is paid the death benefits.
Unit-linked Insurance Plan
A Unit-Linked Insurance Plan (ULIP) combines investment with insurance. At the end of the policy, the policyholder gets a certain sum. This is unlike a term plan where the payout is made only on the death of the policyholder. Part of the premium is paid for life insurance, while the remainder is invested in either stocks or bonds, depending on the investor’s risk appetite and investment goals. The investments yield returns which are then given to the policyholder after the end of the policy period
Everything you need to know about recurring deposits!
Looking for an easy saving tool? A recurring deposit (RD) may be the answer to your question. So, what is recurring deposit? An RD account is one where you invest a specific amount of money every month.
But what is RD account for, you ask? Well, you earn an interest on your saving. It is a simple investment tool that helps you learn the discipline of investing money every month as well as earn interest on your investments.
Almost all banks offer RD accounts. The interest offered is different for every bank. It usually lies in the range of 5 to 8 % per annum.
What are the features of an RD account?
There are several aspects to an RD account. Some of the main features are:
Minimum saving: You can start with a minimum saving of Rs10. It is a saving tool for all classes. An RD account gives you the chance to start saving low and grow eventually.
Tenure: The minimum period for which you can invest in an RD account is six months. You can invest for up to 10 years.
Interest rate: The interest earned on your RD account is comparable to other investment tools such as fixed deposits.
Discipline: RD accounts help you develop the habit of saving on a regular basis.
Loan against RD: You can avail a loan against your Recurring Deposit account, which acts as a collateral.
Withdrawal: You can only withdraw at the end of the tenure. While premature withdrawals are not allowed, some banks may allow you to withdraw prematurely against a penalty.
What are the benefits of RD account?
There are various advantages of an RD account. Let’s look at some of these advantages:
High returns: Most banks offer an interest on their RD account which is at par with other savings schemes such as the fixed deposit. Some even offer higher interest rates than savings account. You stand to earn high returns even by making small investments in the beginning.
Start low: You can start an RD with as much as Rs10. It gives you the freedom to start with small investments. So, what is RD account for? You make small investments every month and earn interest.
Simple process: Starting an RD account is very easy , especially if you have an existing savings account. In that case all you have to do is link the RD account to 6the savings account.
Good for short-term goals: You can start saving in an RD to fulfil your short-term expenses. It also helps you inculcate the habit of saving money regularly.
Save in piecemeal: An RD account lets you make small deposits at regular intervals, unlike other savings schemes that require you to deposit large amounts in a go. At the same time, the interest is at par with such schemes.
What is RD account if not an ideal saving tool for starters?
If you are new to investments and want to develop a habit of saving money, RD account is the right option for you. It is also ideal for people with low incomes who want to save money for achieving short-term goals.