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Understanding the right financial instruments to park your savings can be a challenging task. Two popular investment options in the Indian context are Fixed Deposits (FDs) and Recurring Deposits (RDs). However, knowing what the difference between RD and FD is can help in making an informed decision.
Fixed Deposits (FDs)
Fixed Deposits (FDs) refer to financial instruments where an individual can invest a lump sum amount for a fixed period, and earn interest at a predetermined rate. The maturity amount, i.e., the principal plus interest, is payable at the end of the tenor. The interest rates for FDs are typically higher than those for savings accounts, making them an attractive option for those looking for assured returns. Also, the FD receipt provided by banks is proof of the deposit made and can be used to avail loans.
Recurring Deposits (RDs)
On the other hand, a Recurring Deposit (RD) is a type of term deposit where investors can deposit a fixed amount every month for a specific period. The interest is calculated and paid upon maturity, along with the principal amount. An RD is considered a disciplined form of saving as it prompts regular monthly deposits.
Key Differences Between RD and FD
The fundamental difference between RD and FD lies in the investment methodology and liquidity. While FD involves lump sum deposit, RD encourages regular smaller investments. FD offers more liquidity since it can be prematurely withdrawn (sometimes, with a penalty). However, RDs offer a penal interest rate for premature withdrawals.
Moreover, a key difference between RD and FD lies in the tax aspects. While the interest earned on both RD and FD are taxable under the Income Tax Act, 1961, FD provides an additional tax saving feature. You can claim a deduction of up to Rs 1,50,000 for the amount invested in tax-saver FDs under Section 80C of the act.
Example Calculation
Let’s assume you want to invest Rs. 1,00,000 in an FD with an annual interest rate of 6.5%. At the end of five years, the maturity amount would be approximately Rs. 1,36,722. However, if you were to invest Rs. 1,667 every month (adding to Rs. 1,00,000 in 60 months) in an RD with the same rate of interest, your maturity amount would only be about Rs. 1,17,000. Therefore, if you have a lump sum to invest and desire higher returns, an FD may be more suitable, whereas an RD is an excellent option for regular savings.
Both FD and RD are safe investment options, especially for risk-averse investors. Yet, the decision on FD vs RD should align with your financial goals, liquidity requirements, and risk tolerance levels, as both investments have their pros and cons.
In conclusion, understanding the difference between RD and FD can help you better plan your finances. It’s essential to analyse both these options, consider your financial goals, investment horizon, and risk appetite before making any decision.
Disclaimer:
This article is intended only to provide a basic understanding of FDs and RDs. Any decision to participate in the financial market should be based on thorough research and considered advice from financial advisors. FD and RD interest rates vary as per individual banks and are subject to change according to RBI guidelines.
Summary:
The article provides an overview of two popular savings strategies in India – Fixed Deposits (FDs) and Recurring Deposits (RDs) and highlights the difference between RD and FD. While both provide risk-averse, guaranteed returns, the primary distinction lies in their investment methodology and liquidity. FD is a preferred choice when there is a lump sum to be invested without regular withdrawals. On the contrary, RD encourages regular saving and is suitable when one does not have a significant amount to invest upfront. The right investment will depend significantly on the investor’s financial goals and liquidity needs. A careful evaluation of both these options can help individuals maximise their savings.
