Fixed deposits (FDs) and recurring deposits (RDs) are popular investment options in the country. Both instruments are considered by risk-averse investors, who prefer investing a fixed amount to get returns at a fixed rate.
While investors can park a lump sum amount in FDs, they can invest a set amount each month in case of RDs. The principal amount deposited is returned at the end of the tenure along with interest in case of RDs.
"RDs are a way to start saving regularly and to build up a corpus towards a short-term goal. Investing in RDs is completely risk free and gives guaranteed returns at an interest rate similar to FDs," explained Adhil Shetty, CEO of BankBazaar.
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However, as the rate of interest is currently around 6 percent, Shetty opined that returns from RDs and FDs after tax are quite low.
The primary difference between FDs and RDs is that the former is a one-shot investment for a set period, while the latter is a periodic investment for a fixed duration. This means RDs can be preferred by those who do not have a lump sum to invest.
The interest rates and tax liabilities of RDs and FDs are similar. However, FDs tend to give a higher return, experts suggest.
Shetty elaborated the same with an example.
“Suppose, an investor parks in Rs 24,000 in an FD at the start of the year versus Rs 2,000 per month in a recurring deposit for one year. Both products offer 6 percent rate of interest compounded quarterly. At the end of the year, the FD will give an interest of approx Rs 1,472, while an RD will give an interest of approx Rs 790," he said.
The difference is because in an FD, one invests a lump sum amount that earns interest for one year. However, in an RD, the first installment earns interest for 12 months period, the second for 11 months, third for 10 months and so on.
Hence, FDs give a higher amount on maturity.
Disclaimer: CNBCTV18.com advises investors to check with certified experts before taking any investment decisions.
First Published: Aug 21, 2020 3:28 PM IST
