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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