Nowadays, a number of attractive investment
options are offered by various banks and NBFCs. Among them, recurring and Fixed Deposits have proven to be the safest and the
most popular investment schemes in India. They are safer than equities, as they
are not subject to market fluctuations and provide fixed returns. However,
several investors often find it difficult to decide between FDs and RDs.
If you’re stuck in a similar predicament, it’s
essential that you understand the difference.
What is a Fixed Deposit?
In a Fixed Deposit, you can put in a large sum of
money for a specific amount of time and earn a much higher interest amount than
a savings bank account. Most investors will receive excellent returns once the
FD matures. Today, the FD rate of interest on a 1-year term FD is about 7.75% to
8.75%.
How do FDs Work?
One of the major characteristics of Fixed
Deposits is that you’ll benefit only if you keep the investment untouched till
maturity.
When you choose to invest in an FD, you will be
given a list of tenure options to pick. Each term comes with a predetermined
rate of interest. For example, the rate of interest for a 1-month FD can be
around 7%. For a 1-year FD, it can easily touch 7.75%. The rate of interest
will increase further if you choose a longer tenure.
Once your FD matures, you can either withdraw it
or move it to a more rewarding Fixed Deposit scheme.
Pros of FDs
● Low risk
There is no risk of losing money when you invest
in a Fixed Deposit. However, you might lose interest charges if you withdraw
prematurely. So, if you don’t want to invest for a long tenure, choose shorter
tenures and keep reinvesting, till you need the money for other financial
purposes.
● Assured security
You can be absolutely certain that you will
receive returns from an FD. You can also be assured that this deposit will
remain safe during the entire tenure. So, investors who want some peace of mind
can choose a Fixed Deposit, rather than more risky options, such as stocks and
shares.
● Liquidatable asset
FDs can be liquidated easily and you can always
withdraw your deposit in the case of an emergency. Though you will be charged
for a premature withdrawal and lose a small percentage of your interest, it’s
still a better option than selling property or stocks.
● Flexibility
Fixed Deposits are quite flexible as you can
invest for a period of 7 days to a year or even more. You can also invest a
small amount, unlike other investment options like real estate where you’ll
have to invest heavily.
Cons of an FD
● Penalty for premature withdrawal
If you withdraw your FD before it matures, you
will have to pay a penalty. This penalty might be deducted from the interest
you have earned or you might have to pay it separately.
● Returns can be low
One of the disadvantages of an FD is that you
will only get fixed returns. Unlike Mutual Funds, where your return is
dependent on how your assets have performed in the market, an FD doesn’t offer
higher returns.
● Tax implications
A Fixed Deposit gives you the chance to earn
assured returns but they are taxable. If the interest you gain is more than
Rs.10,000, then your financial provider will debit TDS. If you don’t fall under
the taxable category, you have to submit form 15G or 5H to get a refund.
What is a recurring deposit?
Recurring deposits are a kind of term deposit
wherein you invest a fixed amount every month.
Recurring deposits will fetch you good returns
provided you don’t default. Any interest earned will be considered taxable as
per the investor’s individual tax slab. The difference is that, unlike FDs, the
tax is not deducted at the source for recurring deposits.
How do RDs work?
Recurring deposits work similarly to Fixed
Deposits. The biggest difference here is instead of depositing a lump sum, you
input a specified amount of money every month. You can decide the amount when
you sign up for the RD. At the day of maturity, you’ll get your principal
amount plus the interest earned.
Pros of RDs
● Simplicity of investment
As an investor, depositing a fixed, small amount
from your income is easy and doesn’t burden you financially. This is why an RD
is seen as a convenient and simple investment option.
● Predetermined terms
Investing in a recurring deposit comes with a
clearer horizon, with a consistent amount to be deposited every month. This
allows you to plan ahead and stay prepared for any unforeseen events, such as a
wedding or buying an automobile.
● Fixed rate of interest
In an RD, the rate of interest stays fixed and,
unlike with other investments, it isn’t subject to market conditions. Thus, you
will stay safe from inflation or a fluctuating economy.
● No TDS applicable
Unlike FDs, recurring deposits are not taxed at
the source, thereby ensuring the complete interest amount is credited to your
account.
Cons of RD
● No liquidity
You cannot withdraw funds from an RD when you
wish; so if you’re expecting liquidity, an RD is not for you.
● Interest Rates
Compared to FDs, recurring deposits offer much
lesser rates of interest.
● No flexibility
You cannot change the investment amount after it
has been decided. So, unfortunately, if you have a shortage of money and can’t
keep up with the regular installments, you’ll lose a substantial amount of
money. Therefore, RDs are better for those who have some sort of predictability
in their incomes.
What should you do?
You can only make a decision after scrutinizing your financial situation and availability of funds. If you have a large sum of
money that you want to invest, then an FD is right for you. If you’re a
salaried professional with a steady income, you might be more comfortable
investing in an RD. You will definitely be able to earn better returns with
these investment options, but it’s wise to go through the terms and conditions
of each type and pick the one that’s more suitable for you.
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