Indians have traditionally preferred parking their savings in relatively safer avenues like bank deposits – fixed deposits (FDs) and recurring deposits (RDs). In fact, as per a 2019 survey by the Securities and Exchange Board of India (SEBI), more than 95% of Indian households preferred bank deposits to other investment instruments.
With bank deposits earning a lot of goodwill over the years, it is essential to understand the kind of deposits offered by banks and their features.
The difference between an FD and an RD
Fixed Deposit
An FD is an investment plan where the investor makes a lump sum investment for a fixed amount of time with a fixed rate of interest. This investment is an easy way to derive returns from money that would otherwise sit idle or unutilised.
Once the FD is created, market fluctuations do not affect the returns on that deposit. The duration and rate of interest varies across financial institutions. The duration could range from 7 days to 10 years, while the rate of interest ranges from 3% to 8%, as of August 2021.
There are certain FDs that offer tax benefits. You can also apply for a loan and offer an FD as collateral. FDs can be a source of regular income for senior citizens in terms of interest payouts.
The different types of fixed deposits available for investors are –
- Normal FD: With fixed tenure and rate of interest
- Tax-saving FD: A 5-year FD with one-time investment that provides deduction for the investment amount under the Income Tax Act
- Senior Citizen FD: Has a slightly higher interest rate than normal FD
- Cumulative FD: Works on the concept of compound interest, where the return on investment is reinvested in the principal amount
Recurring deposit
An RD is more like systematic investment plan, but instead of the equity or debt market, your money is deposited in a bank deposit every month. Just like an FD, the duration and rate of interest for an RD varies across different financial institutions. It has a duration ranging from 6 months to 10 years and interest rates from 5.75% to 8%.
Which one should you opt for?
What is the difference between RD and FD? Which one should you pick? FDs and RDs are broadly in the same range when it comes to the rate of interest offered.
The difference between RD and FD is that an FD is a one-time investment with fixed returns, and an RD requires multiple investments of comparatively smaller amounts. The minimum amount required for an FD ranges from Rs. 1,000 to Rs. 10,000; whereas the minimum amount for an RD ranges from Rs. 100 to Rs. 1,000, depending upon the financial institution.
Choosing the right option to grow your wealth
While bank deposits might be simpler and safer investment instruments with high liquidity, there are other options that could help you to grow your wealth in a better manner. Avenues like gold ETFs, stocks and mutual funds are can earn better returns, depending on market conditions.
As investing in such instruments is subject to market risks, it is prudent to explore options and get advice through a financial advisor who can curate bespoke investment plans that are based on your financial goals, age, and risk appetite.