It was right after college; I started my first job, and I was eager to start investing. I thought fixed deposits were the best bet. They offered steady returns, flexible tenure, the entry amount was affordable, and the best part was that it was without any additional risks. I knew my money was safe and secure in the bank, earning decent interest and helping me secure my future. Until I found out about recurring deposits. My lack of research meant I couldn’t take advantage of recurring deposits – try an investment that was more aligned with my goals. Don’t make the mistakes I made – learn the difference between Fixed Deposits and Recurring Deposits to choose right.
Fixed deposits (FDs) and recurring deposits (RDs) are two of the most popular investment options in India. They are offered by banks and post offices. Individuals can invest in these investments at a predetermined interest rate and for a fixed tenure.
Fixed deposits and recurring deposits are amazing investments for risk-averse investors. The money deposited in these investments is safeguarded against market fluctuations. A fixed deposit is a lumpsum investment whereas recurring deposit is a regular monthly investment for a fixed period. Both have interest rates that are fixed before the investor starts investing. Interest varies based on the provider, investor and the duration of investment.
Fixed deposits and recurring deposits can be a good addition to your portfolio. One of the biggest distinctions between the two investments are that fixed deposits are great for one-time investors whereas recurring deposits are for investors looking to invest at regular intervals. Let’s examine the differences between the two investments in detail.
What are Fixed Deposits?
Fixed Deposits are the most popular and favored investment mode among Indian households. And why not! It feels safe to have an investment that guarantees a risk-free return. A fixed deposit allows you to put a lumpsum amount with the bank with a fixed interest rate and lay back for a good long period. Once the deposit matures, you can withdraw your money and enjoy the interest earned over the selected period.
All popular banks such as SBI, HDFC, ICICI, Axis Bank and many more offer fixed deposits to investors. The minimal lumpsum amount for investing in FDs start at ₹1000. There is no maximum limit on investment. Here are some features of fixed deposits:
- Fixed Interest Rate: The interest rate is typically fixed for the entire deposit term, providing a predictable return. The interest rates offered by banks are usually between 3-7%.
- Fixed Tenure: FDs have a predetermined maturity period, ranging from 7 days to 10 years.
- Higher Interest Rates: Compared to savings accounts, FDs generally offer higher interest rates, making them attractive for investment.
- Safe and Secure: FDs are considered relatively safe investments, backed by government insurance schemes like Deposit Insurance and Credit Guarantee Corporation (DICGC).
- Regular Interest Payments: Interest can be paid out periodically (e.g., monthly, quarterly, annually or maturity) or compounded, increasing the overall earnings.
- Auto-Renewal: Many banks offer the option to automatically renew the FD upon maturity, ensuring continued investment without manual intervention.
- Tax Provisions: Banks deduct TDS on FD interest income when the interest earned in a financial year exceeds Rs.40,000 for regular depositors and Rs.50,000 for senior citizens.
- Affordable: Investing in FDs start at ₹500-₹1000, making them accessible to a wide range of investors.
- Minimum Deposit Requirements: There may be a minimum deposit amount required to open an FD, which can vary depending on the bank and deposit tenure.
- Early Withdrawal Penalties: Premature withdrawal of an FD often incurs penalties, as it disrupts the bank’s investment plans.
Let’s discuss the next most important investment amongst Indians – recurring deposits!
What are Recurring Deposits?
A recurring deposit (RD) is a popular savings option in India that allows individuals to systematically deposit a fixed sum of money into their account at regular intervals, typically monthly.
This financial instrument is offered by banks and financial institutions, catering to individuals who aim to cultivate a disciplined savings habit while earning a modest interest on their deposits. Just like FDs, all popular banks and Indian post offices.
The basic concept of a recurring deposit revolves around the idea of regular and predetermined contributions. Individuals commit to depositing a fixed amount, known as the installment, into their RD account every month for a predetermined period, often ranging from six months to ten years.
The interest rates offered on recurring deposits are generally higher than regular savings accounts, making it an attractive option for risk-averse investors seeking stable returns. Here are some the features of recurring deposits:
- Monthly Deposits: RDs require consistent monthly contributions, making them suitable for disciplined savers. You can start with ₹500 or more!
- Fixed Tenure: RDs have a predetermined maturity period for which the investor deposits their money.
- Fixed Interest Rate: The interest rate for RDs is generally fixed for the entire deposit term. The rates are between 2.50%-8.50%
- Special Offers: Women and senior citizens can get special rates for investing in RDs.
- Smaller Deposit Amounts: RDs often have lower minimum deposit requirements, making them accessible to those with limited funds.
- Flexibility: Some banks allow for additional deposits or withdrawals within the RD tenure, providing flexibility.
- Compound Interest: Interest earned on RDs can be compounded, increasing the overall returns over time.
- Tax Benefits: TDS is decreased by the bank at a 10% rate. For regular people, the TDS threshold is Rs.40,000. In other words, if interest income exceeds Rs.40,000, the bank will lower TDS. If not, TDS won’t be decreased and there won’t be any interest paid into the investor’s bank account. For older citizens, the TDS threshold is Rs.50,000.
- Safe and Secure: RDs are generally considered safe investments, backed by government insurance schemes.
- Easy Management: RDs can be easily managed through online banking or by visiting a bank branch.
Let’s compare the FDs vs RDs in detail:
Difference between fixed deposit and recurring deposit
Here’s a clear view of the difference between fixed deposits and recurring deposits:
| Feature | Fixed Deposit (FD) | Recurring Deposit (RD) |
| Investment amount | Lump-sum investment at the beginning | Fixed amount deposited monthly |
| Tenure | Ranges from 7 days to 10 years | Ranges from 6 months to 10 years |
| Interest Rates | Starting at 3.50% – 9.25% interest rates | Starting at 2.50%-8.50% interest rates |
| Interest Payout | Can be paid monthly, quarterly, or at maturity | Paid at maturity along with principal |
| Liquidity | Can be withdrawn before maturity with penalties | Early withdrawal may lead to account closure |
| Tax Implications | TDS applicable on interest exceeding ₹10,000 | TDS applicable on interest as per income tax rules |
| Loan Facility | Loans can be availed against FDs | Loans can also be availed against RDs |
When to Choose a Fixed Deposit?
Fixed deposits (FDs) are ideal for individuals looking for a safe, secure, and predictable investment with a guaranteed return. Investors who have a considerable lumpsum amount can invest it in FDs for a short duration. FDs can procure higher returns than savings account and can help diversify a portfolio. Here are some financial conditions/goals where FD is a good option of investment:
- Short-term Savings Goals: If you have a specific short-term goal, such as saving for your child’s laptop or summer vacation, then an FD can be a great way to accumulate funds.
- Emergency Fund: FDs can serve as a reliable emergency fund, providing quick access to cash in case of unexpected expenses.
- Retirement Planning: If you have a significant lump sum to invest for retirement, an FD can be a low-risk option to grow your savings.
When to Choose a Recurring Deposit?
Recurring deposits (RDs) are ideal for individuals who prefer a disciplined approach to saving over time. RDs allow investors to regularly save money over a duration of time. Investors who can set aside a considerable amount monthly can consider RDSs. Here are some ideal scenarios for investing in RDs:
- Regular Income: RDs are perfect for individuals with a regular income who want to set aside a portion of their earnings each month.
- Long-Term Goals: If you have long-term financial goals such as retirement planning or looking to save for your child’s education, an RD can help you accumulate funds consistently over time.
- Building Wealth: RDs are a great way to build wealth gradually through regular, disciplined savings.
- Avoiding Impulsive Spending: By committing to regular deposits, RDs can help you avoid impulsive spending and stay focused on your financial goals.
Pros and Cons of Fixed Deposits vs Recurring Deposits
| Investment | Pros | Cons |
| Fixed Deposits | Higher interest rates compared to savings accounts Guaranteed returns Safe and secure investment Ideal for lump-sum investments Can be used for short-term goals | Withdrawal may incur penalties Fixed maturity period Interest rates may be lower than other investment options in certain market conditions Tax deductions up to 10% |
| Recurring Deposits | Disciplined savings approach Suitable for long-term goals Lower minimum deposit requirements Flexibility in additional deposits or withdrawals (in some cases) Can build wealth gradually | Requires regular monthly contributions Early withdrawal may be restricted or subject to penalties May not be suitable for those with irregular income or fluctuating financial situations |
The best option between FDs and RDs depends on your individual financial goals, risk tolerance, and investment horizon. FDs are suitable for those seeking higher returns on a lump sum investment for a specific period, while RDs are better suited for individuals who want to save consistently and build wealth over time. Start investing!
