There are a plethora of investment options out there to increase the value of your money.
You can double it up, book some capital gains or at least gain an edge over inflation.
Investments are always better.
When it comes to sure-shot interest rates wrapped up in safe and secure methods, FDs and RDs are two of the most popular plans to invest.
They are easy to understand, give stability to the portfolio and, prepare you for the future.
Fixed Deposit and Recurring Deposit having a lot in common have some differences too.
When you apply for a fixed deposit (FD) at any bank, the written loan agreement states that your interest rate will be a fixed percentage, say 9.5%, for the term of the deposit.
While, when you apply for a Recurring Deposit (RD), your interest rate keeps changing like a time series from day to day. Before choosing one over the other.
let us compare their differences and similarities in details.
In this article, we will focus on the key differences that separate FD from RD.
What is a Fixed Deposit?
A Fixed Deposit is a lump sum investment made in tenure for fixed deposit interest rates. It is a one-time investment.
One can choose to withdraw the ROI at fixed time intervals or all at once (Maturity).
A penalty is applicable on a premature withdrawal.
Fixed deposits are very safe tools for saving money. If you’re young and just starting out, often FDs are your only option, as loans usually require collateral that you don’t have yet.
A Fixed Deposit is a bank product, which has a maturity period fixed on the date of deposit (hence the name). This is currently the most secure investment instrument offered by banks in India.
What is a Recurring Deposit?
A Recurring Deposit is an investment made in fixed instalments for deposit interest rates. Like an FD, one can withdraw the ROI, at fixed time intervals or Maturity.
A Recurring Deposit (RD) is a type of savings account from which you accumulate interest over time.
An RD works like this: You deposit money into an RD on a monthly basis, and the bank gives you a higher interest rate than its regular savings accounts.
The high interest rate is to compensate for the fact that you are tying up your money for 10 -15 years in an RD.
A Recurring Deposit is an investment tool offered by banks in India. It is one of the simplest tools to Save Tax in India.
A Recurring Deposit is a regular deposit of a fixed sum of money in a bank account.
This is used as an investment to earn interest for the depositor. The fund can be withdrawn after a certain period.
Let’s start with an example:
Let’s say that you invested INR 50,000 for a Tenure of 1 year in a Fixed Deposit. Your bank offers a fixed deposit interest rate of 7%.
At the end of the term plan (1 year), you got a maturity amount of INR 53,593.
This time you opted for a Recurring Deposit. You invest the same amount of money (INR 50,000) with an ROI (Rate Of Interest) of 7%.
You decided to invest INR 4,166 per month. But this time, you end up with a maturity amount of INR 51,916.
That’s INR 1,677 less than the maturity amount that you got in an FD.
This difference is caused by the compounding effect being greater in the FD. Since INR 50,000 were invested as a lump sum amount, its ROI compounded over 12 months.
On the contrary, when we took monthly instalments into account the compounding effect dampens since only the initial instalment (INR 1,677) compounded over 12 months concerning the ROI (7%).
The second instalment compounded over 11 months, the third one over 10 months and so on.
The comparison makes it obvious that a Fixed deposit is more profitable compared to Recurring Deposit.
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Some More Points Of Comparison Between FDs and RDs
Tenure: The tenure of an FD can lie anywhere, between 7 days to 10 years. The tenure for an RD ranges from 6 months to 10 years.
Minimum Deposit: The lower limit of a deposit for an FD is INR 100 while that of an RD is INR 1000.
The difference between Fixed Deposit and Recurring Deposit is that a fixed deposit has a pre-specified maturity period and is issued at predetermined interest rate.
A recurring deposit or RD is a savings scheme offered by banks in which the depositors can opt for different frequency of installment payments along with the initial investment. It could be weekly, monthly or quarterly.
The interest rate for RD depends upon various factors such as bank’s generosity etc.