Recurring Deposits (RD) is an investment tool that will make you a systematic investor, which means you can invest a fixed amount in an RD account every month.
Fixed Deposit (FD) and Recurring Deposits (RD) comparison
In the case of a Fixed Deposit or FD, you need to invest in a lump sum. Whenever you have a lump sum amount that you will not need immediately, and you can keep it in an account for a good interest rate, and FD will be useful. However, an RD is certainly different from FDs.
The Recurring Deposits (RD) will provide you the flexibility to invest money according to your ability. If you are a monthly wage earner, an RD will be a great opportunity to save money. Before investing in RD, fix a monthly budget of basic needs and leisure. Then calculate the surpass money. A percentage of that amount, you can invest in an RD for regular investment habits. The rest of the money you can invest somewhere else like mutual funds, SIPs, LIC, etc. Apart from Post Office, in the other banks, you can open an RD account for the tenure of from 1 year to 10 years.
Hence the major difference between an RD and an FD is, in the first one you can start the account with a very low amount, according to your ability, but in an FD, you will need a larger amount of money. The interest rates will also vary in these two cases, which will also change on the pre-decided term.
However, the RD is a popular investment tool because of the security quotient that comes with it. RD will provide assured income after a certain period, as it will have a pre-decided interest rate on it. In the case of mutual fund SIP, an investor can invest a monthly habit, but there the money will be linked with the equity markets. Thus, the fall and rise of the equity markets impact your saved money. But, RDs are offered with the assurance of interest rates. At the time of account opening, you will have to fix a term for the RD. After that fixed period, you will be able to get the invested amount with interest.
Interest rates are lucrative
Interest rates of RDs are certainly better than the bank or Post Office savings schemes. A 5 years Post Office RD account will attract a 5.80% interest rate that will be compounded quarterly. In SBI, the RD interest rate depends on the term, it will vary from 5.00-5.30%. SBI's RD has a term period of a minimum of 12 months to a maximum of 120 months. ICICI bank will offer interest on RD from 3.50% to 5.60%. Axis Bank offers interest from 3.50% to 5.75%. Only the senior citizens will get an additional interest of around 0.50% under these banks, than the public. So, compared to that the Post Office will allow you to avail a better interest rate available, with an opportunity of advance deposit. Through this, you can make an advance deposit of up to 5 years in an RD account. Additionally, in a Post Office, you can start an RD account with Rs. 100, which is very low, compared to the other banks.
A similar kind of investment opportunity with a better interest rate is a Public provident fund or PPF. Only in PPF, the term of lock-in period is much higher than RDs.