Recurring Deposit V/s Fixed Deposit: 4 Differences
Today, maintaining a bank account has become a norm. You need to provide your bank account number on various occasions; like receiving the salary from employer or subsidy from the government under a scheme. And most people open either fixed deposits or recurring deposits.
There are several reasons why people confuse a recurring deposit and a fixed deposit. Their similar features and benefits like steady returns, safety of capital, and popularity as saving vehicles leave people confused and some of them are left asking, “What’s the difference?” between a recurring deposit and a fixed deposit.
Granted, both are great fixed income products, but here are a few major differences between the two that are worth knowing about, to make better informed choices between them-
What is a Fixed Deposit?
A Fixed Deposit is a saving instrument where you put a lump sum amount for a fixed period of time and earn a fixed rate of interest. On maturity you earn the principal invested along with the interest, which you can always reinvest! They are also called term deposits because you park money in them for a given tenure.
What is a Recurring Deposit?
Recurring deposit is a type of term deposit where the objective is to inculcate the habit of saving and the incentive is that you earn a fixed rate of interest on investing a fixed sum of money on a regular interval. Unlike an FD, where you invest a lump sum for a definite period of time and receive fixed returns, in RDs you are allowed to invest a fixed amount at regular intervals, like say on a monthly basis.
When an FD matures, you receive the principal you invested along with the interest you earned, and when an RD matures, the depositor receives the total amount, which is the amount of money you invested on a regular basis along with the interest earned on it. Here due to the compounding effect, you may find, an FD earns more on maturity than an RD, but RD offers flexibility and is a good start if you want to start saving small, in the beginning of your investment journey.
Intent to save periodically or lump sum
Generally, depositors go for FDs when they have a lump sum amount of money to park in a savings instrument to earn a decent and stable return. But if they want to get into the habit of saving and earn interest income on small sized but regular savings, then RD is the way to go!
An early withdrawal of a fixed deposit can result in penalty. So, for example, if you put your fixed deposit for a five-year lock-in period, you cannot withdraw the money until it matures. Doing so may attract a penalty of 1 per cent. However, recurring deposits are the ideal investment platform in case you’re planning short-term goals. These include saving up for a down payment for your home, or paying for a child’s education.