Fixed Deposit or Recurring Deposit: Which one is a Better Investment?
Fixed Deposits, as well as Recurring Deposits, are investment vehicles that offer fixed returns along with a capital guarantee. Fixed Deposits and Recurring Deposits do not require any regular maintenance as they are not subject to market volatility and extremely simple in nature.
Difference between a Fixed Deposit and a Recurring Deposit
1) Type of Investment
•A Fixed Deposit Scheme is a single one-time lump sum investment.
• A Recurring Deposit is an investment where you choose a term and invest in it at regular intervals. In a Recurring Deposit Scheme, you enter into a Fixed Deposit Scheme at the frequency of monthly, quarterly, half-yearly investments depending on what you find comfortable.
2) Tenure-
• The tenure of a Fixed Deposit Scheme is – minimum 7 days to a maximum of 10 years.
• The tenure of a Recurring Deposit is – minimum 6 months to a maximum of 10 years.
3) Minimum Investment Amount-
• The minimum amount required to open a Fixed Deposit Scheme is INR 5000.
• The minimum amount required to open a monthly Recurring Deposit account with some banks is as low as INR 100.
4) Rates: Fixed Deposit interest rates are usually slightly higher than Recurring Deposit interest rates. Also, Fixed Deposit returns are higher than Recurring Deposit returns for comparable tenures and investment amounts. • Let us assume you have created a Fixed Deposit investment of INR 30,000 for a term of 5 years. You have assured a Fixed Deposit interest rate of 7.25%. After 5 years, your total investment value (Principal amount + compound interest) will be INR 42,968. • If you opt for a Recurring Deposit account in which you invest INR 500 per year for a period of 5 years and are assured interest of 7.25%, your total investment amount will be INR 30,000 and your return will be INR 36,207 (total investment amount plus compound interest).
5) Tax Saving Benefits-
• Fixed Deposits that have tenure of 5 years, qualify for tax deduction under section 80C.
• Recurring Deposits don’t qualify for tax benefits under section 80C.
6) Liquidity:
• Fixed Deposit Schemes require you to invest lump sum amounts for the tenure you select. You can withdraw prematurely but usually by paying a penalty.
• Recurring Deposits don’t block up large chunks of your money but rather give you the option of regularly investing smaller amounts that you can comfortably do so either monthly, quarterly, half-yearly or annually. You can withdraw pre-maturely but that attracts a penalty in Recurring Deposit Schemes too.
Which is better- A Fixed Deposit or a Recurring Deposit?
• If you can keep larger amounts of cash invested for a longer tenure and also require tax-saving benefits, a Fixed Deposit is a better investment for you.
• If you wish to invest small chunks of money regularly over the tenure of your choice, Recurring Deposit accounts are a better investment option for you. If you desire to create an investing discipline in yourself, then Recurring Deposits are more suitable.
To conclude, whether a Fixed deposit is better for you or a Recurring deposit is ideal for you depends on your financial situation. Get in touch with us here.