The tendency to save is inbuilt within us. Most people try to save without involving any risks, by depositing their money in banks, while others invest their money for a better future. However, most forms of investment carry a certain level of risk, which may not be acceptable to many people.
This is where term deposits come in. Fixed Deposits and Recurring Deposits are term deposit services provided by banks. They can help you multiply your money without any risks involved. While both share the common idea of deposits, there are some differences that you have to consider while investing in either of them.
- Fixed Deposits: The concept of Fixed Deposits (FDs) is very common and popular in India. It is considered to be one of the safest and risk-free forms of investment. It enables an individual to invest his savings by depositing money in the bank for a specified tenure, at a fixed rate of interest. This helps the investor gain money at a higher rate of interest than a regular savings account.
- Recurring Deposits: Recurring deposits enable the investor to save money on a regular basis, by deducting a specified sum of money each month from their savings account, and putting it in a recurring account. The interest on a recurring account generally runs at a similar rate to that on a fixed deposit.
Period of investment:
- Fixed Deposits: You can invest in a fixed deposit for a minimum duration of 7 days and a maximum duration of 10 years.
- Recurring Deposits: You can invest in a recurring deposit account for a minimum period of 6 months and a maximum period of 10 years.
Eligibility for opening the account:
- Fixed Deposit: A fixed deposit account can be opened by all citizens of India.
- Recurring Deposit: All citizens of India can enroll for a recurring deposit account. A parent or guardian can also open an RD account for the minors in their families.
The impact of compounding frequency based on compound interest:
- Fixed Deposit: The interest rate you gain on a FD account is subjected to compounding at regular intervals that are decided by the bank. If you gain interest on the amount that was deposited on an annual basis, the interest amount will also increase simultaneously due to the new balance each year.
- Recurring Deposit: In a recurring deposit, the interest is compounded on a quarterly basis. So when an investor deposits his amount on a monthly basis, he earns the interest in every 3 months. This interest is then added to the account of the investor, so the interest that was deposited also gets compounded on a quarterly period basis.
The better option
There is a huge difference, technically, while investing in either of the options. Your choice is totally dependent on your needs. For example, a person who has an income of INR 50,000 to 60,000 can invest the amount of INR 50,000 in a fixed deposit and earn the benefits of FD on an annual basis. But, a person who has INR 35,000 to 40,000 income can choose to invest in an RD, due to the flexibility on the deposit period provided by RD conditions of the banks.
For example, let us say the deposit amount for FD and RD is INR 24,000. In an FD the person has to deposit the amount in a lump sum, but in an RD the person can deposit INR 2000 monthly for 12 months. If the interest rate is taken 9 percent annually, the person who has invested in FD will gain the benefit of INR 2,234 and the person who has invested in RD will earn INR 1,195.
In reality, when it comes to profits, investing in an FD is a better option, as it provides more profit to the investor than what is earned by a person who has invested in an RD. However, when it comes to flexibility, RD is the better option.