Recurring Deposit is a great instrument for people having regular income to have a large lump sum return over a period.
Recurring Deposits (RDs) are kind of improvised term deposits, where deposits are made through a series of regular periodic payments unlike a single payment made in case of fixed deposits (FDs). It helps salaried people and other people having regular income to deposit a fixed amount every month into their RD account and earn interest at the rate applicable to FDs.
While deposits in an RD account may be done on recurring basis, there are restrictions on withdrawal before the end of the term. For banks, the term may vary from 1 year to over 5 years, but Post Office offers RDs for a tenure of 5 years only. Premature withdrawals may result in reduced rate of return, while discontinuation in deposits may result into closure of the account.
Although it is like systematic investment plan (SIP) applicable in mutual funds, but in case of RDs, the objective of the periodical payment system is not to reduce the risk or generate return higher than lump sum investment through rupee-cost averaging. As the rate of return is not fluctuating in case of RDs, the objective of periodic deposits is just to make the payment convenient for risk-averse people.
However, RD is a great instrument for people having regular income to have a large lump sum return over a period. Some people also use it as a tool to accumulate an amount required for lump sum yearly payments – like for payment of insurance premium – through monthly deposits in RD account, thereby availing discount for annual premium payment as well as earning interest on the amounts deposits on recurring basis.
Post Office RDs offer quite high interest rate of 7.3 per cent per annum compounding quarterly and are safer due to Sovereign guarantee, but you have no other options but to invest only for 5 years. Moreover, you can’t make the periodic investments online and have to deposit the installment amounts either in cash or through cheques.
On the other hand, there are wider choices of selecting the term for RD accounts in banks as well as you have the convenience of making the investments online through standing instructions to your bank. However, the rates of RD interest vary from bank to bank and from tenure to tenure. For the tenure offering best interest rate in the bank of your choice, please refer to the following table.