From Post Office RD, Bank RD to Debt MF SIP, find out your option for risk-free recurring deposits

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Published: June 13, 2019 1:43:45 PM

For short-term investments, investments in these funds are considered safer, as they remain unaffected by daily fluctuations in the equity markets.

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Post offices along with all major banks across the country offer Recurring Deposit (RD). RDs are in the form of a term deposit. Recurring deposits are made through a series of regular periodic payments, unlike a single payment made in case of fixed deposits (FDs). RD provides risk-free investment opportunities to investors, hence the popularity among Indian customers. Risk-averse investors can easily opt for post office or bank RDs.

In RD you can deposit a fixed amount periodically. The term of this kind of deposit normally ranges from 6 months and 10 years. Experts suggest investors can also look at other investment tools such as debt mutual fund through SIPs, which are also similar in nature. For short-term investments, investments in these funds are considered safer, as they remain unaffected by daily fluctuations in the equity markets.

If you are planning to invest, know these options and how do they differ.

Bank Recurring Deposits

The interest rates offered by banks are the same as the interest rates offered on term deposits. The interest you earn on your recurring deposit, however, depends on the amount you contribute and the tenure of the deposit you choose. Investors can also avail a loan with their recurring deposits. RDs as collateral are accepted by banks and borrowers can take a loan of 80 to 90 per cent of the value of the deposit as a loan. Even though you can deposit in an RD account on a recurring basis, Bank Recurring Deposit comes with restrictions on withdrawal before the term ends. The term varies from 1 to over 5 years for banks, unlike post office schemes.

The rate of return of Bank Recurring Deposits is not fluctuating and convenient for risk-averse people. The objective of the periodical payment is not to generated a higher return than lump sum investment (SIP) through rupee-cost averaging or to reduce the risk. People also use Recurring Deposits to accumulate an amount required for lump sum yearly payments, for instance, payments of insurance premium.

Post Office Recurring Deposits

Post Office offers nine saving schemes, out of which one is a Recurring Deposit (RD). It offers attractive interest rates to the investors, but unlike Time Deposits (TDs) where one needs to deposit the money in one go, with RDs, you can only opt for monthly deposition. RD investors, however, do not enjoy any income tax benefit.

Post office RDs offer an interest rate of 7.3 per cent (quarterly compounded). According to India Post, RD accounts can be continued for an additional five years on a year-to-year basis. While you can deposit in an RD account on a recurring basis, there are restrictions on withdrawal before the end of the term. For instance, these RDs come with a tenure of 5 years only. Premature withdrawals can also result in a reduced rate of return.

Debt Mutual Fund

Systematic Investment Planning (SIP) allows investors to invest a fixed amount regularly in mutual fund schemes, mostly related to equity. Debt mutual funds, on the other hand, invest mainly in a combination of fixed income securities or debt, as the name suggests. Such as Treasury Bills, Money Market instruments, Government Securities, Corporate Bonds, and other securities.

Debt mutual fund SIP, on average, can provide you with a return of around 7 to 8 per cent. Investors can also customize the SIP according to his/her requirements. For instance, you can either choose from daily, weekly, monthly, quarterly, or yearly. Systematic Investment Planning follows Rupee Cost Averaging. That helps investors to average their purchase cost and maximize returns. Investors can also start SIP for additional amounts or cancel an existing SIP and start a new one. You can make withdrawals from your fund without paying any penalty on it, unlike bank recurring deposits.

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