Investors seek secure and dependable strategies to steadily increase their income in the challenging financial climate. Recurring Fixed Deposits (RDs) are a popular investment option that caters to persons who are risk-averse. These investment solutions provide regular savings and interest income at a fixed rate that is certain to be steady and predictable.
For the majority of investors, the recurring fixed deposit is one of the most reliable investment options. But are they a good strategy for saving large sums of money? Continue reading further to know the benefits and drawbacks of these deposits.
What are Recurring Fixed Deposits?
RDs are fixed deposits for individuals who want to save money regularly and earn a fixed interest rate. These deposits are similar to traditional fixed deposits, which banks and other financial institutions provide, but it allows for more frequent contributions.
In India, most major banks offer RD Accounts with a term typically 6 months to 10 years. Still, individuals can choose a term that suits their needs and preferences. However, the interest rate, once determined, does not change during the tenure; on maturity, the individual will receive a lump sum payment that includes both the regular investments and the interest earned.
Features of RD Account
● The purpose of RD schemes is to encourage people to save regularly.
● Depending on the bank, the minimum amount for deposits varies. You could invest as little as Rs 1,000.
● Deposits can be made for a minimum of six months and a maximum of ten years.
● RDs can be funded monthly through standing instructions, instructions given to the bank by the customer to credit the RD account every month from the customer’s savings or current account.
Pros and Cons of Recurring Fixed Deposits
Let’s Understand the Pros and Cons of Investing in RDs:
Pros:
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Low Risk
RDs are regarded as low-risk investments because of their fixed interest rate. Throughout the investing period, when returns can fluctuate, RDs provide a stable interest rate, thus making it a low-risk investment.
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Guaranteed Returns
One of the main advantages of RDs is the guarantee of returns. Because the interest rate is predetermined when the RD is opened, investors may relax knowing the precise amount they will receive at maturity.
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Flexible Tenor
Investors can choose the tenor of their RD according to their financial needs and goals. The maturity date can be matched to certain financial milestones thanks to the tenor’s flexibility, which typically ranges from 6 months to 10 years.
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Simple to Open
When it comes to opening accounts, RDs are renowned for their ease of opening. The process often requires a little paperwork, making it easy for investors to start.
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No Limit on the opening of RDs
Investors can open as many RDs as they want. They are permitted to maintain any number of RD accounts.
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Digital Process
You can also invest in RDs online with digitisation. You can also manage them entirely through digital facilities. A major advantage of RDs is that most issuers have an app allowing you to track your investment anywhere.
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Achieving financial success
The goal of any investment is to accumulate wealth to fund a certain goal, long-term or short-term. The major advantage of RDs is that they provide lucrative returns and flexible maturities to help you attain your goals.
Cons:
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Low-Interest Rates
One of the main negatives of RDs is that their interest rates are generally lower than those of other investment options like stocks or Mutual Funds. RDs might not be as tempting to investors looking for greater returns.
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Lock-In Period
When investors make an RD investment, their funds are locked in for the duration of the tenor. Unlike other investing options, the funds cannot be withdrawn before the maturity date without incurring penalties.
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Penalty for Withdrawing Early
If investors need to withdraw money from an RD before the tenor ends, they will be penalised for that withdrawal. This may affect overall returns and deplete some of the interest received.
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Monthly Instalments
While RD demands a monthly payment, sometimes it doesn’t work in their favour because the investors can be low on money and need to prioritise elsewhere. This can result in penalties if the instalment is missed or there is a delay in payment. Therefore, scheduling payments in advance is a good choice to avoid paying extra fees.
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Lack of flexibility
Instalment amounts and tenors cannot be changed after opening the RD account. These are fixed, and thus investors must be careful and must be sure before opening their RD account.
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Tax Implications
RD interest is taxed; therefore, investors may own a significant amount of tax on their returns depending on the tax slab they fall into. Furthermore, investors cannot deduct any tax from the amount they put into RD since those deposits are not eligible for tax benefits under Section 80C of the Income Tax.
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Inflation impact
Since RDs have a set interest rate, the returns on an RD may need to increase to keep up with inflation. As a result of decreased purchasing power due to inflation, the value of your returns may gradually decrease. This will majorly impact if the investor’s tenure is between 5 to 10 years as the inflation’s impact will be felt much more in the long duration compared to short-period investments. So ensure to put inflation in the calculations as well.
Conclusion
Recurring Fixed Deposits are a fantastic option for investors who want to establish a disciplined saving routine with reliable returns and minimal risk. Due to its low risk, guaranteed returns, and flexibility in terms of tenure, this type of deposit appeals to cautious investors. However, investors must carefully consider the lower interest rates that lock the tenor before investing in RDs. When doing this, everything must be taken into account to prevent penalties from being applied. Make sure to select a manageable monthly investment amount.
