Difference Between Fixed and Recurring Deposit
Fixed deposit and recurring deposit are popular investment options for individuals looking to grow their savings securely. Gaining an understanding of these differences will enable you to make an educated choice when selecting the investment approach that best fits your financial goals..
Basics of Fixed and Recurring Deposit
Let's start by defining these two types of fixed deposit and recurring deposit
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Fixed Deposit :
A fixed deposit is a lump-sum investment made for a specific tenure at a fixed interest rate. The interest is generally compounded quarterly or annually, and you cannot withdraw the money before the maturity date without incurring penalties.
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Recurring Deposit:
A recurring deposit is a systematic savings plan where you deposit a fixed amount at regular intervals, usually monthly. RDs also offer a fixed interest rate, but they allow for more flexibility in terms of monthly contributions and withdrawal options.
Tenure and Lock-In Period
One of the primary difference between FDs and RDs is the tenure and lock-in period:
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Fixed Deposit :
FDs typically have longer tenures ranging from a few months to several years. They come with a lock-in period during which you cannot withdraw the principal amount without penalties. Longer tenures generally yield higher interest rates.
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Recurring Deposit:
RDs have shorter tenures compared to FDs. The lock-in period is also shorter, making it more liquid. You can pick the tenure based on your goals and preferences, making it suitable for short-term savings.
Benefits of Fixed Deposit and Recurring Deposit
Investors often consider fixed deposits (FDs) and recurring deposits (RDs) as investment options that offer multiple benefits. Here are the key advantages of each
Benefits of Fixed Deposit:
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Flexible tenure:
FDs offer a wide range of tenure options, which range from 7 days to 10 years, allowing investors to choose a duration that suits their financial goals.
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Steady income:
Investors can opt to receive interest payments at regular intervals or at the time of maturity, providing a steady source of income.
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Safety of capital:
FDs are considered low-risk investments, as the principal amount is guaranteed by the bank or financial institution, ensuring the safety of the investor's capital.
Benefits of Recurring Deposit:
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Systematic savings:
RDs help investors develop the habit of regular savings as they are required to deposit a fixed amount of money at regular intermission, such as monthly or quarterly.
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Flexible deposit amounts:
RDs allow investors to choose the amount they want to deposit, making it a suitable option for individuals with varying income levels.
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Low minimum investment:
RDs have a lower minimum investment requirement compared to FDs, making them accessible to a wider range of investors.
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Ideal for short-term goals:
RDs are suitable for individuals with short-term financial goals as they offer flexible tenure options, ranging from months to a few years..
Interest rates
Interest rates play a huge role in the growth of your savings. Here's how FDs and RDs differ in this aspect
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Fixed Deposit :
FDs typically offer higher interest rates compared to RDs. These rates are fixed at the time of deposit and remain constant throughout the tenure, providing a predictable return on your investment.
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Recurring Deposit:
RDs offer competitive but slightly lower interest rates compared to FDs. These rates are also fixed but are usually calculated on a quarterly basis, which can result in slightly lower overall interest earnings.
Liquidity and Premature Withdrawal
The ability to access your funds when needed is a crucial factor in choosing between FDs and RDs:
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Fixed Deposit :
FDs have limited liquidity. You can withdraw the money before maturity, but this usually comes with a penalty, which varies from bank to bank. Premature withdrawals can significantly reduce your interest earnings.
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Recurring Deposit:
RDs offer greater flexibility. While there may still be penalties for premature withdrawals, these are generally lower than those for FDs. This flexibility makes RDs a better choice for those who may need access to their savings in emergencies.
Tax Implications
Taxation is another essential consideration when comparing FDs and RDs:
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Fixed Deposit :
The interest earned on FDs is full taxable as per your income tax slab. This implies that you will be required to fulfill tax obligations on the accrued interest, thereby potentially affecting your overall investment gains.
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Recurring Deposit:
Similar to FDs, the interest earned on RDs is also taxable. However, Tax Deducted at Source (TDS) is applicable only if the interest exceeds a certain threshold. RDs offer some tax benefits for individuals in lower tax brackets.
In summary, fixed deposit and recurring deposit are both valuable investment options.
Your decision should be based on your financial objectives, risk tolerance, and liquidity requirements.
Ultimately, the right choice depends on your individual financial circumstances and objectives. It's advisable to consult with Moneyedge to determine which option really aligns the best with your goals and risk profile.
Frequently Asked Questions
There is no maximum amount that can be invested in an FD account; nonetheless, it may differ from one bank to the next. Depositors who invest more than Rs. 1 crore in a fixed deposit can receive customized interest rates from their bank.
Most banks require a Recurring Deposit to be held for at least six months. Depending on the depositor, these deposits can be opened for 6 months to 10 years. Once the tenure and RD amount are set, they cannot be changed until the deposit maturity.
