Fixed Deposit vs RD
Updated on: Sep 21st, 2023 | 10 min read
People usually either invest a lump sum amount at one go or set aside a part of their earnings regularly to save systematically. You can choose either of these depending on what suits your financial needs of varying time horizons and the amount of surplus money you have at a given point of time.
Fixed-income instruments should be your go-to choice if you are looking for secure returns providing above average capital protection. Term deposits are fixed income instruments that offer the means to achieve all of the above mentioned — low-risk investment avenue, fixed returns and choice over investment frequency Term deposits popularly take two forms – Fixed Deposits and Recurring Deposits.
In both these forms, the deposited amount earns a predetermined interest. Since these deposits are mostly made with regulated entities, the returns are near guaranteed. Further, these deposits of up to Rs. 5 lahks are insured by the Deposit Insurance and Credit Guarantee Institution (DICGI). both the capital and interest payments are therefore safeguarded. Furthermore, both instruments come with the facility of premature withdrawal, and one can avail of loans against using these instruments as collateral. Confused about which one to invest in? How do you decide which one is more suitable for you?Continue reading to learn more about the difference between FD and RD
What is a Fixed Deposit
A fixed deposit (FD) is a type of term deposit offered by banks and select other financial institutions. With a fixed deposit, you agree to deposit a certain amount of money for a specific period of time, known as the term of the deposit. In return, the bank pays you a fixed rate of interest on your deposit for the duration of the term.
Fixed deposits are generally considered to be a safe and stable investment option, as they offer a guaranteed return on your money. They are typically used by people who have a large amount of money to save and who do not need access to that money for a specific period of time.
Here’s an example of how a fixed deposit works:
- Let’s say you have 10,000 INR that you want to save for a year.
- You decide to open a fixed deposit account with a bank, and agree to deposit 10,000 INR for a term of one year.
- The bank offers you an interest rate of 5.5% per year on your deposit.
- At the end of the one-year term, the bank will pay you 550 in interest on your deposit (5.5% of 10,000).
- You can either choose to withdraw your money and the interest earned, or you can choose to roll over the fixed deposit for another term and continue earning interest.
What is a Recurring Deposit
A recurring deposit (RD) is also a type of term deposit offered by banks and select other financial institutions. With a recurring deposit, you agree to make regular,relatively smaller deposits over the term of the deposit, rather than making a single lump sum deposit as in the case of an FD. The interest rate on a recurring deposit is typically lower than the interest rate on a fixed deposit (FD), because the bank only has the use of the deposited amount for the duration of that particular deposit.
Recurring deposits are a good option for individuals who want to save money on a regular basis, but who may not have a large amount of money to deposit all at once. They are also generally more flexible than fixed deposits, as you have the option to make additional deposits or withdraw your money ( you will usually have to pay a penalty to do so).
Here’s an example of how a recurring deposit works:
- Let’s say you want to save 5000 INR per month for a year.
- You decide to open a recurring deposit account with a bank, and agree to make monthly deposits of 5000 INR for a term of one year.
- The bank offers you an interest rate of 5.5% per year on your deposits.
- At the end of the one-year term, the bank will have received a total of 60000 INR in deposits from you.
- The bank will pay you interest on your deposits, calculated at the agreed-upon rate of 5.5% per year.
- You can either choose to withdraw your money and the interest earned, or you can choose to roll over the recurring deposit for another term and continue making regular deposits and earn interest.
Fixed Deposit vs Recurring Deposit
Here are the differences between FD and RD
| Parameters | Fixed Deposit | Recurring Deposit |
| Frequency of deposit | Lump sum amount once | Every month |
| Tenure | 7 days to 10 years | 6 months to 10 years |
| Tax Benefits | An exemption on investment of up to Rs. 1.5 lakh in the case of tax-saver FDs with a tenure of 5 years | No such exemption |
| Who should invest | Someone with a lump sum amount looking to invest it in one go | Someone with a steady income stream looking to invest savings periodically |
| Automatic renewal | Available | Not available |
Final Thoughts
As you have seen, RD and FD have both similarities and differences. While both give near risk-free returns and are not affected by market changes, the effective interest on FDs turns out to be higher than that on RDs, this is more obvious in the case of a cumulative FD.an RD lets you create a substantial corpus from small monthly savings in contrast to an FD that demands for a one-time lump-sum. When choosing between RD vs FD, you must consider the surplus amount in hand, the interest rates offered and the financial goals you are aiming to achieve.
FAQs
What are the benefits of investing in FDs?
The benefits of investing in an FD are:
- Fixed returns: FDs offer fixed rates of interest on the deposit amount. These returns are not market-linked and hence are not subject to any fluctuation
- Low-risk: Bank FDs are regulated by RBI. Also, deposits of up Rs. 5 lakh are insured by the Deposit Insurance and Credit Guarantee Corporation. Hence the underlying risk is little to non-existent.
- Hassle-free: FDs can be opened online in a few clicks. You can transfer an FD, avail loan on it and can also renew it automatically.
- Continuous income: By investing in a non-cummulativeFD scheme, you can ensure a regular flow of income in the form of interest.
- Tax Benefit: You can claim tax benefits for a deposit of uptoRs. 1.5 lakh in tax-saver FDs under section 80C of the Income Tax Act
What are the disadvantages of a fixed deposit account?
Some of the disadvantages of investing in FDs are:
- Low interest rate: The interest rate on FDs is usually lower than returns from other market-linked instruments
- Taxation: Interest income from FD is taxable, and a TDS is also deducted
What does the interest rate on RDs depend on?
The interest rate on RDs depends on:
- Age of the investor: Senior citizens get higher interest rates on an RD
- Bank: The interest rates differ from bank to bank; small finance banks offer higher interest
- Tenure of the RD: Longer the tenure, the higher the interest rate.
Can I change the RD amount in between?
Once an RD has started, you cannot change the amount or the tenure of the RD.
Which is better: a short-term FD or a long-term FD?
Longer-term FDs come with higher interest rates. Therefore, if you can lock your investment amount for a longer period, you could consider opting for a long-term FD.
Which is better: Recurring Deposit or SIP?
Both these savings schemes are beneficial for those having a regular income stream. A recurring deposit earns interest from being a term deposit, while a SIP invests in a bucket of equity or debt instruments. The latter is the riskier of the two and is subject to market fluctuations. SIP offers better returns over the long-term investment horizon. A recurring deposit gives assured returns and secures the deposited capital. However, premature withdrawal from RD could attract some penalties. Depending on your risk appetite and investment horizon, you can select either SIP or a recurring deposit.
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