Understanding Fixed Deposit and recurring Deposit.7 min read
Who doesn’t love a risk-free investment? Particularly in India, the popular financial philosophy is to maximize savings and keep your money secure, while letting it grow at a steady pace. That is why both Fixed Deposits and Recurring Deposits are floated as the ideal investment options for many.
However, when it comes down to it, what are the essential differences between the two? And which one of these qualifies to be the perfect financial option for you? Let us take a closer look at the features and differences between a Recurring Deposit and a Fixed Deposit account.
Fixed Deposits and Recurring Deposits
Fixed Deposit accounts are a form of fixed income product offered by banks whereby one can deposit a certain amount as savings, earn interest and agree not to withdraw it until the maturity date. On the other hand, a Recurring Deposit is a type of fixed income product by which one can regularly deposit a fixed amount and earn interest applicable to the resultant savings.
Both Fixed Deposits and Recurring Deposits essentially offer an option for people to protect their finances while enjoying high interests on their savings. They both also share a number of similarities:
- They can both be used as collateral for availing of loans.
- They both require you to provide a nominee to be the beneficiary of your eventual income.
- Incomes generated by both are taxable under Income Tax laws.
- An early withdrawal from both types of accounts typically invite a penalty.
What are the major differences between the two?
Purpose of investment
The primary difference between why people go for either a Fixed Deposit or a Recurring Deposit depends on the reason that a person chooses to invest in either one. If someone who has a regular income but not a considerable amount of savings otherwise, they are likely to opt for a Recurring Deposit. Recurring Deposits require monthly deposits, so they become a savings option for people who are earning and want to ensure they get some returns from the savings they accumulate.
Fixed Deposits, on the other hand, are the ideal option for people who have even an adequate amount of money that would otherwise just lie around in your bank account as idle savings. Because Fixed Deposits interests are incurred on a one-time, lump sum principal amount, your savings can grow to great proportions. That is why Fixed Deposit accounts are generally the perfect option for people who want to maximise savings while being able to reap high returns.
No matter what their financial needs or goals may be, saving is one of the primary priorities for every individual. Some of us may be at a financial stage where we can invest a large sum in a deposit account in one go, and afford to wait several years until the account reaches maturity. Meanwhile, others may have certain short-term goals in mind that they would like to achieve with a fixed budget and within a few months
Therefore, the type of deposit account that works for you would provide you with the ideal investment tenure for your specific financial requirements. In the case of Recurring Deposit, tenures typically range from at least a year and go up to 10 years. For Fixed Deposits, however, the minimum tenure for investment is far lower. There is far more flexibility for potential investors since the tenure can be as short as 7 days and as long as 10 years for Fixed Deposits.
At the end of the day, your choice of deposit account would also depend largely on the type and amount of returns you can expect from it. After all, the purpose of investing in either a Fixed Deposit or a Recurring Deposit is to avoid accumulating idle money and instead, reap some interest on it.
One factor that determines the returns you earn would be interest rates, but these tend to be similar across the board for both of these options. However, in the case of Recurring Deposits, interests are earned on a recurring basis. So, your first installment will earn interest for 12 months, your second installment for 11 months and so on. However, in Fixed Deposits, you earn interest based on your entire lump sum deposit amount, which is guaranteed to be higher than that earned on deposit installments.
Therefore, we can see that while both serve as excellent savings options, Fixed Deposits tend to edge out with greater benefits. Fixed Deposit accounts offer more flexibility with their range of tenure, provide higher returns and are ideal for anyone seeking to invest any amount of money for a given period of time.