Recurring Deposits vs. FDs- Which Should You Choose?
5 min read | 5 months ago
As they often say, there is no gain without any risk. However, there are still a few investments which may defy this paradigm and rather successfully at that! Yes, we’re talking of fixed deposits (FDs) and recurring deposits (RDs). But what happens if you have to choose between them? Which one do you opt for? Here’s solving this dilemma below.
Introduction
RDs and FDs are primarily fixed-income investment instruments offered by banks and other financial institutions. RD deposits inculcate financial discipline for building up your savings, where you can deposit a fixed sum of money every month or at regular intervals for a specific duration. On the other hand, FDs are a one-time investment, where you deposit a single sum of money for a fixed tenure. Both offer fixed rates of interest, which guarantee your final returns at maturity
Understanding the Tenure Options
Short-Term Tenure
The tenure for short-term fixed deposits is less than 1 year. These are lucrative if you want to withdraw the amount after a short period to meet specific goals. These deposits, thus come with higher liquidity although the interest rates, while competitive, are lower than long-term deposits. So, if you are looking to grow your wealth for the long haul, then these tenures are not what you should opt for.
Benefits of Investing in FDs
FDs offer several benefits to investors. Their interest rates are higher than RDs, meaning that you can earn more on your investment. They also offer a fixed rate of return, which helps you manage your finances better. At the same time, you can choose to get the interest at maturity or receive it every month, quarter, or year, depending on your requirements. There are also options to invest in taxsaver FDs with lock-in periods of five years, which are eligible for tax deductions under Section 80C of the Income Tax Act. You may also get overdraft facilities against FDs at some banks, which enable you to raise funds and repay them conveniently without having to break the investment.
Drawbacks of Investing in FDs
FDs have their share of drawbacks too. The biggest aspect could be the absence of flexibility. Once you put your money into the FD, you cannot withdraw it without incurring a penalty before the maturity period. Also, the liquidity quotient is considerably lower than many other options for investments. Hence, there is always the fear of not being able to access funds during emergencies although an overdraft facility may solve this problem to an extent.
Factors to Consider while Choosing Between RDs and FDs
So, which one should you choose? Here are some factors worth considering in this regard.
1.Tenure and flexibility of investment
RDs offer greater flexibility in terms of tenure and amount of investment, while FDs offer more fixed options. If you have a specific financial goal in mind and want to save regularly, RDs may be a better option. However, if you have a lump sum amount that you want to invest for a fixed period, FDs may be a better option.
2. Interest rates and returns
FDs generally offer higher interest rates and returns than small finance bank RD rates. However, the interest rates may vary based on the tenure and amount of investment. Therefore, it is important to compare the interest rates offered by different banks before making a decision.
3. Liquidity and premature withdrawal penalties
RDs offer greater liquidity than FDs, as you can withdraw your money at any time without incurring a major penalty. However, premature withdrawals from RDs can result in lower returns. On the other hand, FDs have a penalty for premature withdrawals, which can reduce the returns on your investment.
Conclusion
In conclusion, both RDs and FDs have their own benefits and drawbacks, and the choice between the two depends on your individual investment goals and preferences. If you want flexibility and regular savings, RDs may be a better option, while if you have a lump sum amount and want higher returns, FDs may be a better option. Compare both these investments on the basis of the aspects. mentioned above before deciding. You can even include both of them in your portfolio for not only diversification, but also to enjoy the best of both worlds, as they call it!
FAQs
1. What is the difference between a recurring deposit and an FD?
Recurring deposits require monthly deposits of a fixed amount, while FDs require a lump-sum deposit for a fixed tenure.
2. Which one offers a higher interest rate - RD or FD?
FDs usually offer higher interest rates compared to RDs, but the interest rate depends on the tenure and the bank's policies.
3. Which one is better for short-term saving goals - RD or FD?
If you have a short-term saving goal, an RD might be a better option as it allows you to save in small amounts. FDs are better suited for long-term goals
About Unity Small Finance Bank
Unity Small Finance Bank is committed to making banking simpler and more accessible for everyone. Our services include Savings Account, NRI account, Current Account, Fixed Deposits, and Personal Loans offering flexible tenures and attractive interest rates. We also offer financing options like MSME Loans and Microfinance to support businesses and underserved communities. Learn more about Unity Small Finance Bank here.
