Fixed Deposits vs Recurring Deposits: Which Is Better for You?

In India, many individuals still prefer to invest the majority of their savings in traditional low-risk investment avenues, such as Fixed Deposits and Recurring Deposits. Fixed Deposits (FDs) and Recurring Deposits (RDs) are considered to be safer than stocks and equity mutual funds because they are not linked to the market and offer a fixed rate of return. However, when it comes to investing, many conservative investors find it difficult to choose between these two options. This article explains everything you need to know about FDs and RDs, including the difference between FDs and RDs, so that you can decide which one is better for you.

What Is a Fixed Deposit?

Fixed Deposit, also known as FD or Term Deposit, is a financial instrument offered by banks, Non-Banking Financial Companies (NBFCs), and post offices to their customers to help them securely save their money and earn reasonable returns on it.

Here Are the Key Features of the Fixed Deposits (FDs):

1. FD allows you to invest your savings for a fixed period at a fixed rate of interest.

2. You receive a lump sum amount back along with the interest at the end of the term. Each bank and NBFC offers a different rate of interest depending upon the Fixed Deposit term.

3. The Fixed Deposit interest rate is guaranteed and does not fluctuate with the market conditions.

4. Even if the bank/NBFC changes the rate of interest for that particular term, they are bound to pay you the same rate of interest they had offered when making a Fixed Deposit.

5. You can deposit your savings for a term based on the available Fixed Deposit tenures of the banks/NBFCs, which generally range from 7 days to 10 years.

6. Once you make a Fixed Deposit for a specific period, premature withdrawals or partial withdrawals are generally not allowed.

7. There are several types of Fixed Deposits to choose from, such as Regular Fixed Deposit, Flexi Fixed Deposit, Senior Citizen Fixed Deposit, NRO Fixed Deposit, NRE Fixed Deposit, Tax Saving Fixed Deposit, Children's Fixed Deposit, Employee Fixed Deposit, and many more.

8. You can choose to receive the interest upon maturity with a cumulative interest-earning or receive it monthly, quarterly, half-yearly, or yearly.

9. You can set a mandate for the maturity amount to be automatically received into your registered Savings Account, reinvest the entire FD amount (auto-renewal of principal + interest), or reinvest only the principal amount (auto-renewal of principal only).

What Is a Recurring Deposit?

A Recurring Deposit, commonly known as RD, is a unique Term Deposit option offered by Indian Banks. This investment choice enables individuals to make regular deposits and earn satisfactory returns on their invested capital. By combining periodic deposit contributions with interest accrual, RDs prove to be a straightforward and flexible approach to their investment journey.

Here Are the Features of Recurring Deposits (RDs):

1. Recurring Deposits encourage a regular savings habit among individuals.

2. The deposit period can range from a minimum of six months to a maximum of 10 years.

3. Interest rates for RDs are comparable to those offered for FDs. These rates may vary from one bank to another and are contingent upon the RD term.

4. Senior citizens often enjoy an extra 0.5% to 1% interest rate on RD investments.

5. At the end of the Recurring Deposit term, investors receive a lump sum amount, which includes both the principal and interest.

6. Various banks have different minimum deposit requirements. While most leading banks allow investments from Rs 500 per month, many public sector banks allow RD investments as low as Rs 100 per month.

7. While premature withdrawals are an option, they are subject to the bank's terms and conditions. Banks typically pay a reduced interest rate of 0.5% to 1% less than the prevailing rate on the date of deposit for the period the deposit remained with the bank.

8. Recurring Deposits can be systematically funded through Standing Instructions. Customers can instruct the bank to transfer a fixed amount into the RD account each month from their Savings or Current Account.

What Are the Benefits of Investing in FDs And RDs?

1. Security And Guaranteed Returns:

Fixed Deposits and Recurring Deposits are renowned low-risk financial instruments that carry virtually no risk to your investment. Moreover, the returns are stable, unaffected by market conditions. Even when other, more volatile financial instruments are influenced by market fluctuations and uncertain returns, FDs and RDs consistently provide the same returns. This stability can be beneficial when managing your investment portfolio. Furthermore, a Cumulative Fixed Deposit can further serve as a means to accumulate wealth over time.

2. Tailor Your Investment Tenure to Meet Your Financial Goals:

You have the flexibility to invest your funds in a Bank FD for a minimum of 7 days up to a maximum of 10 years and a minimum of 6 months in an RD, allowing you to choose the investment duration that aligns with your financial goals. For instance, if you are saving for a long-term goal, such as a child's education, you can opt for a term of 5 to 10 years. Conversely, if you anticipate needing funds in the near future but still want to earn a higher interest rate compared to a Savings Account, you can opt for a short-term FD or RD with automatic renewal to avoid losing interest.

3. Ease of Fund Withdrawal:

In times of financial strain, you have the option to prematurely withdraw your Fixed Deposit and Recurring Deposit before its maturity date. However, keep in mind that such withdrawals typically incur a penalty ranging from 0.5% to 1%, depending on the FD amount. This option can provide quick access to funds during emergencies, though with a nominal penalty charge.

4. Diverse Options to Suit Your Needs:

As mentioned earlier, there exists a variety of Fixed Deposit and Recurring Deposit types to choose from to align with your specific requirements. For instance, if you seek higher returns and don't need regular interest payouts for your day-to-day expenses, investing in a Cumulative FD is a good choice. Similarly, if you wish to save on taxes while earning interest income, a Tax Saver FD is an excellent option, offering tax exemptions on the principal amount of up to Rs 1.50 lakhs under Section 80C of the Income Tax Act, 1961.

What are the Drawbacks of Investing in Fixed Deposit And Recurring Deposits?

1. Financial Institution Defaults Or Fraud:

While not a common occurrence, it is important to acknowledge the possibility of financial fraud within institutions that could result in the loss of your hard-earned funds. Nevertheless, the Deposit Insurance and Credit Guarantee Corporation (DICGC) offers insurance coverage of up to Rs 5 lakhs per individual per bank. This coverage includes both the principal and interest amounts.

2. Reduced Interest Rates:

In the past, financial institutions used to provide interest rates exceeding 10% to 11% per annum on FDs and RDs. However, current rates typically range from 6% to 7.5% per annum, depending on the chosen bank or Non Banking Financial Company (NBFC). These returns may fall below the inflation rate, making it less advisable to invest all your savings in FDs or RDs.

3. Lock-in Period:

While financial institutions do allow premature withdrawal of your investment, they impose a penalty ranging from 0.50% to 1%. This penalty can significantly impact your returns, especially considering that Recurring Deposit and Fixed Deposit interest rates are already comparatively lower than other market-linked investment alternatives.

4. Option to Get a Loan Against Fixed Deposit:

Many banks offer a credit facility to their Recurring and Fixed Deposit account holders, offering loans or overdrafts. This feature enables you to borrow funds at a reasonable interest rate when you require quick access to money without having to liquidate your investment. Typically, the interest rate on the Loans Against Fixed Deposits is only 1% to 2% higher than the interest you earn on your FD/RD, and you can borrow up to 90% of your FD/RD amount.

What Are the Differences Between FDs And RDs?

The major difference between Fixed Deposits and Recurring Deposits lies in how they work and the pattern of deposits:

1. FD vs RD Frequency of Deposits:

FD allows you to invest a lump sum amount of money for a fixed term, which can range from a few days to several years. You make a single, one-time deposit at the beginning of the term.

RD allows you to make regular, periodic deposits at fixed intervals, typically on a monthly basis. These deposits are usually smaller and continue over the entire RD term.

2. FD vs RD Deposit Amounts:

In the case of a Fixed Deposit, you deposit a single, larger sum at the start of the FD term.

Whereas you make smaller, regular deposits at predetermined intervals throughout the RD term.

3. FD vs RD Interest Calculation:

Interest is calculated on the entire lump sum amount deposited at the beginning of the term.

In this case, the interest is calculated on each instalment separately as they are deposited.

4. FD vs RD Interest Payment:

In a Fixed Deposit, interest can be paid out either on a monthly or quarterly basis or upon the maturity of the plan.

Conversely, in a Recurring Deposit account, interest is disbursed solely to the account holder at the end of the tenure.

5. FD vs RD Flexibility:

Fixed Deposit offers less flexibility in terms of changing the deposit amount or frequency of deposits once the FD is initiated. However, most banks and NBFCs offer Flexi Fixed Deposits that allow you the liquidity of a Savings Bank Account and the higher returns of a Fixed Deposit.

Whereas RDs provide flexibility as you can adjust the monthly deposit amount, although some banks may have restrictions.

6. FD vs RD Suitability:

This investment option is suitable for individuals with a lump sum amount to invest who want a fixed return without making periodic deposits.

Recurring Deposits are ideal for those who want to save and invest regularly with smaller amounts and earn interest over time.

7. FD vs RD Taxation:

The interest generated from both of these investment choices is added to your overall income and taxed according to your applicable income tax slab rates. For instance, if you are in the 30% tax bracket, any interest accrued from your FD or RD is subject to a 30% tax.

Nonetheless, there is a difference in how tax deductions are handled. In the case of FDs, banks withhold TDS (Tax Deducted at Source) from the interest income when it exceeds Rs 10,000 in a fiscal year. Conversely, in the case of RDs, there is no such deduction of TDS.

8. FD vs RD Missed Payments:

In a Fixed Deposit account, there is no possibility of missing payment due dates as the entire payment is made in a single instalment.

On the other hand, with a Recurring Deposit, if an individual fails to make payments for six consecutive months, the bank in question has the authority to terminate their RD account.

Fixed Deposits vs Recurring Deposits: Which Is Better for You?

As you may have understood, Fixed Deposits and Recurring Deposits are quite similar, except for the major difference - investment pattern.

Suppose you have a lump sum amount of Rs 24,000, and you invest it into an FD for a year. Let's say the bank's 1 year FD interest rate is 7% p.a. So, after a year, upon maturity, you will receive a lump sum amount (principal + interest) of Rs 25,725. This means your interest earnings will be Rs 1,725.

Now, let's assume you do not have a lump sum amount to invest, but you can make periodic investments of Rs 2,000 per month for a year, which will amount to Rs 24,000. However, since the interest calculation differs in the case of an RD, the lump sum amount that you receive upon maturity totals Rs 24,926. This means your interest earnings in the case of the RD will be Rs 926 for a period of one year.

Hence, if you have a substantial sum of money available for investment as a one-time payment, Fixed Deposits can be a considerable investment choice. Over the long term, you can achieve higher returns. To enhance your returns, you can opt for a cumulative FD. In this type of FD, the interest earned is added to the principal amount, and you earn interest on the combined sum. Moreover, most financial institutions offer 0.50% to 1% extra rate on interest to the Senior Citizen Fixed Deposits.

If you don't have a significant amount of money to invest as a lump sum, a Recurring Deposit is an ideal investment option. You can contribute a small, predetermined amount every month. Your monthly contribution can be as low as Rs 500 (or even Rs 100 with some banks). Upon maturity, the total amount will be credited to your linked account.

We, at PersonalFN, always advise to be cautious even when investing in Fixed Deposits. You should consider multiple factors when choosing the bank, such as ICRA ratings, Gross NPA, and Capital Adequacy Ratio, among others, instead of just going with the one that offers the highest rate of interest. You can check my recent article, 5 Best Bank FDs for Senior Citizens 7 Key Considerations to Make a Wise Choice, which explains some crucial factors to consider when choosing a Fixed Deposit. Moreover, if you have a higher risk appetite, you may consider investing in Systematic Investment Plans (SIPs) instead of Recurring Deposits. The SIPs not only allow you to make periodic investments as per your budget, but they can also help you achieve your long-term financial goals with its potential to earn higher returns than RDs if planned well.

Happy Investing!

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KETKI JADHAV is a Content Writer at PersonalFN since August 2021. She is an MBA (Finance) and has over seven years of experience in Retail Banking. Ketki specialises in covering articles around banking, insurance, personal finance, and mutual funds and has been doing it for over three years now.

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.
This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.