Recurring or Fixed: Which is the better investment option?

Nowadays, a number of attractive investment options are offered by various banks and NBFCs. Among them, recurring and Fixed Deposits have proven to be the safest and the most popular investment schemes in India. They are safer than equities, as they are not subject to market fluctuations and provide fixed returns. However, several investors often find it difficult to decide between FDs and RDs.

If you’re stuck in a similar predicament, it’s essential that you understand the difference.

What is a Fixed Deposit?

In a Fixed Deposit, you can put in a large sum of money for a specific amount of time and earn a much higher interest amount than a savings bank account. Most investors will receive excellent returns once the FD matures. Today, the FD rate of interest on a 1-year term FD is about 7.75% to 8.75%.

How do FDs Work?

One of the major characteristics of Fixed Deposits is that you’ll benefit only if you keep the investment untouched till maturity.

When you choose to invest in an FD, you will be given a list of tenure options to pick. Each term comes with a predetermined rate of interest. For example, the rate of interest for a 1-month FD can be around 7%. For a 1-year FD, it can easily touch 7.75%. The rate of interest will increase further if you choose a longer tenure.

Once your FD matures, you can either withdraw it or move it to a more rewarding Fixed Deposit scheme.

Pros of FDs

●       Low risk

There is no risk of losing money when you invest in a Fixed Deposit. However, you might lose interest charges if you withdraw prematurely. So, if you don’t want to invest for a long tenure, choose shorter tenures and keep reinvesting, till you need the money for other financial purposes.

●       Assured security

You can be absolutely certain that you will receive returns from an FD. You can also be assured that this deposit will remain safe during the entire tenure. So, investors who want some peace of mind can choose a Fixed Deposit, rather than more risky options, such as stocks and shares.

●       Liquidatable asset

FDs can be liquidated easily and you can always withdraw your deposit in the case of an emergency. Though you will be charged for a premature withdrawal and lose a small percentage of your interest, it’s still a better option than selling property or stocks.

●       Flexibility

Fixed Deposits are quite flexible as you can invest for a period of 7 days to a year or even more. You can also invest a small amount, unlike other investment options like real estate where you’ll have to invest heavily.

Cons of an FD

●       Penalty for premature withdrawal

If you withdraw your FD before it matures, you will have to pay a penalty. This penalty might be deducted from the interest you have earned or you might have to pay it separately.

●       Returns can be low

One of the disadvantages of an FD is that you will only get fixed returns. Unlike Mutual Funds, where your return is dependent on how your assets have performed in the market, an FD doesn’t offer higher returns.

●       Tax implications

A Fixed Deposit gives you the chance to earn assured returns but they are taxable. If the interest you gain is more than Rs.10,000, then your financial provider will debit TDS. If you don’t fall under the taxable category, you have to submit form 15G or 5H to get a refund.

What is a recurring deposit?

Recurring deposits are a kind of term deposit wherein you invest a fixed amount every month.

Recurring deposits will fetch you good returns provided you don’t default. Any interest earned will be considered taxable as per the investor’s individual tax slab. The difference is that, unlike FDs, the tax is not deducted at the source for recurring deposits.

How do RDs work?

Recurring deposits work similarly to Fixed Deposits. The biggest difference here is instead of depositing a lump sum, you input a specified amount of money every month. You can decide the amount when you sign up for the RD. At the day of maturity, you’ll get your principal amount plus the interest earned.

Pros of RDs

●       Simplicity of investment

As an investor, depositing a fixed, small amount from your income is easy and doesn’t burden you financially. This is why an RD is seen as a convenient and simple investment option.

●       Predetermined terms

Investing in a recurring deposit comes with a clearer horizon, with a consistent amount to be deposited every month. This allows you to plan ahead and stay prepared for any unforeseen events, such as a wedding or buying an automobile.

●       Fixed rate of interest

In an RD, the rate of interest stays fixed and, unlike with other investments, it isn’t subject to market conditions. Thus, you will stay safe from inflation or a fluctuating economy.

●       No TDS applicable

Unlike FDs, recurring deposits are not taxed at the source, thereby ensuring the complete interest amount is credited to your account.

Cons of RD

●       No liquidity

You cannot withdraw funds from an RD when you wish; so if you’re expecting liquidity, an RD is not for you.

●       Interest Rates

Compared to FDs, recurring deposits offer much lesser rates of interest.

●       No flexibility

You cannot change the investment amount after it has been decided. So, unfortunately, if you have a shortage of money and can’t keep up with the regular installments, you’ll lose a substantial amount of money. Therefore, RDs are better for those who have some sort of predictability in their incomes.

What should you do?

You can only make a decision after scrutinizing your financial situation and availability of funds. If you have a large sum of money that you want to invest, then an FD is right for you. If you’re a salaried professional with a steady income, you might be more comfortable investing in an RD. You will definitely be able to earn better returns with these investment options, but it’s wise to go through the terms and conditions of each type and pick the one that’s more suitable for you.