Understanding fixed and recurring deposits in banks

In India, fixed deposits and recurring deposits are still the popular ways to invest money. They are safe, offer decent returns and are easy to open and liquidate. In FD, an amount is deposited for a fixed period of time and you get interest on that. While in RD, a fixed amount is deposited in small intervals over a period of time.

Considered one of the safest investment options, fixed deposit offers relatively higher interest in comparison to a regular savings account. The interest is accumulated on the deposited amount over a fixed period of time. And the interest rate varies depending on the type of lender. Senior citizens are usually offered higher rates of interest.

In case of an emergency, you can easily liquidate your FD and get the funds. The tenures in fixed deposit schemes are flexible. Investors can choose the tenure according to their convenience. Once the amount has been deposited at a specific interest rate, it remains unaffected by further changes in interest rates or market fluctuations. Thus, the returns on your deposit are assured.

One should always compare the interest rates before opening an FD account. Public sector banks, private banks and some other small finance banks have different rates of interest. There are several other benefits too, such as loans against FD. One can avail loans of up to 90 per cent of your deposit amount at very low interest rates. FD also provides the option for regular income. One can get the interest sum credited according to the requirements on a monthly, quarterly, or annual basis. 

What is a recurring deposit?

It is a saving avenue that works like the systematic investment plan of a mutual fund. Here a particular amount of money is deducted from your account every month and credited to your recurring deposit. You have to apply for a recurring deposit account and ask the bank to deduct the stipulated amount from your savings or current account every month. The investment tenure ranges from a minimum of six months to a maximum of 10 years. You can either have an individual account or apply jointly with any family member, even a minor 

How is the interest calculated?

Interest on recurring deposits is the same as that on a bank fixed deposit. Also, you can pay more than one instalment at a time, but will not get any interest on the additional amount.

Is premature withdrawal allowed?

You can withdraw prematurely, but the interest paid will be lower than the base rate for the deposit tenure or that for the tenure the deposit has been with the bank. Some banks may subject the deposit to a penal interest of 1-2 per cent. A recurring deposit account has a lock-in period of one month. Premature closure in less than a month will not earn interest. Only the principal amount will be returned.

What happens in case of default?

If you have missed four to six instalments, the bank can discontinue your account. You can revive the account by paying the outstanding money within one month from the last default. The interest applicable will be in accordance with the bank’s premature withdrawal policy. You can also take a loan or an overdraft, up to 90 per cent of the balance, against the recurring deposit. During an emergency, this may be a better option than withdrawing your savings as the deposit keeps earning interest and you get a loan at a rate lower than a personal loan.

When should you apply?

It is a good saving avenue for creating an emergency kitty or liquidity for a near-term goal. Those starting off their careers or with low incomes can use this option.