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Fixed Deposit vs RD

Updated on: 19 Jan 2024 | 10 min read

People usually invest a lump sum at one go or set aside some 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 time. Regarding fixed-income instruments, you can either invest in Fixed Deposits or Recurring Deposits depending on your earnings and financial goals.

What is a Fixed Deposit

An FD is a term deposit offered by banks and other financial institutions where you agree to deposit a certain amount of money for a specific period of time. In return, the bank pays you a fixed interest rate on your deposit for the duration of the term. They are typically used by people with a large amount of money to save and who do not need access to that money for a specific period.

What is a Recurring Deposit

A recurring deposit (RD) is also a term deposit offered by banks and other financial institutions where you make regular, relatively smaller deposits over a tenure than 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 regularly but may not have enough to deposit all at once. They are also generally more flexible than fixed deposits, as you can make additional deposits or withdraw your money ( you will usually have to pay a penalty).

Fixed Deposit vs Recurring Deposit

Here are the differences between FD and RD

ParametersFixed DepositRecurring Deposit
Frequency of depositThe lump sum amount onceEvery month deposit
Tenure7 days to 10 years6 months to 10 years
Tax BenefitsAn exemption on investment of up to Rs. 1.5 lakh in the case of tax-saver FDs with a tenure of 5 yearsNo such exemption
Who should investSomeone with a lump sum amount looking to invest it in one goSomeone with a steady income stream looking to invest savings periodically
Automatic RenewalAvailableNot Available

FD vs RD – Which is Better?

Let’s consider some examples in the table below. In the first example, you invest Rs 24000 annually in FDs to match the investment in the recurring deposit, which is Rs 2000 per month for 3 years. The interest offered is 7.2% for FDs compounded annually, and for RDs, it is compounded monthly.

 

Return on FD

TenureFixed Deposit PrincipalInterest Earned on FD (7.2%)FD Maturity Amount
1 Year24000172825728
2 Years48000716155161
3 Years720001669988699

 

For the 2nd year, Rs 48000 deposited at 7.2% in the first year is earning an interest of Rs 3456, making the amount at the end of the first year Rs 51456. This Rs 51456 becomes the year's principal and earns Rs 3705 as interest, resulting in a maturity amount of Rs 55161. You can similarly calculate the maturity amount for Rs 72000 deposited for 3 years.

 

Return on RD

TenureRecurring Deposit Amount p.m.Interest Earned on RD (7.2%)RD Maturity Amount
Month 12000122012
Month 22000244036
Month 32000366072
Month 42000488121
Month 520006110181
Month 620007312255
Month 720008614340
Month 820009816438
Month 9200011118549
Month 10200012320672
Month 11200013622808
Year 1200014924957
Month 13200016227119
Month 14200017529293
Month 15200018831481
Month 16200020133682
Month 17200021435896
Month 18200022738123
Month 19200024140364
Month 20200025442618
Month 21200026844886
Month 22200028147167
Month 23200029549462
Year 2200030951771
Month 25200032354094
Month 26200033756430
Month 27200035158781
Month 28200036561146
Month 29200037963525
Month 30200039365918
Month 31200040868325
Month 32200042270747
Month 33200043673184
Month 34200045175635
Month 35200046678101
Year 3200048180581

 

For RD the interest and the maturity amount have been calculated in the following way.

TenureRD Amount p.mInterest Earned on RD (7.2%)RD Maturity Amount 
Month 120002000* (0.072/12) =122000+ 12 = 2012
Month 22000+ 2012 = 40124012*((0.072/12)= 244012 + 24 = 4036

 

Difference between FD and RD Maturity Amount

TenureDifference between FD and RD Maturity Amount
Year 1771
Year 23390
Year 38118

 

As you can see in the above tables, you will receive Rs 25728 in an FD after a year, while in an RD, you will receive Rs 24957. So, the recurring deposit in a year will earn you Rs 771 less than a fixed deposit. But, this difference increases when we invest Rs 24000 in a fixed deposit for 3 years and Rs 2000 p.m. in a recurring deposit for a period of 3 years. After 3 years, you will receive Rs 88699 in an FD, while in the recurring deposit, you will receive Rs 80581 on maturity.

Final Thoughts

In both these forms, the deposited amount earns a predetermined interest. The returns are nearly guaranteed since these deposits are mostly made with regulated entities. Further, these deposits of up to Rs. 5 lahks are insured by the Deposit Insurance and Credit Guarantee Institution (DICGI). Furthermore, both instruments come with the facility of premature withdrawal, and one can avail of loans against using these instruments as collateral. 
While both FD and RD give near risk-free returns and are unaffected 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. When choosing between RD and FD, you must consider the surplus amount in hand, the interest rates offered and the financial goals you aim 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.

Who can invest in an RD?

Any individual above 18 years who wants fixed returns but does not have a lump sum amount right away can opt for an RD.

Is there a monthly or quarterly interest payout option in RD?

No. The interest will either be paid on maturity or premature closure of the RD.

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