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Recurring deposit (RD)

Recurring deposit scheme offers an opportunity to build savings by following regular monthly deposit of fixed sum over a period and having enough money to achieve specific financial goals after that specific period ends. In simple terms, recurring deposit is referred to unique term-deposit which is being offered by Indian banks. RD means an investment tool enabling people to make regular deposits and helping them earn reasonable returns on investment made.  Because of regular deposit factor and an interest component, this instrument offers flexibility and ease of investments to users/individuals.

However, investors are required to know that RDs are different from Fixed Deposits/FDs. RDs tend to be flexible in most of its aspects. RD account holder has an option to choose to invest a specific amount every month and he/she earns interest on the investment amount. More often than not, these deposits are an ideal saving-cum-investment instrument.

Most of the renowned banks in India provide recurring deposit accounts, having term which often ranges from 6 months to 10 years. Individuals can choose a term according to their specific needs. Once interest rate is determined, it does not change during its tenure. On maturity, individuals will be paid lumpsum amount including regular investments and the interest earned.

Features of a recurring deposit

Recurring deposit schemes help in building a regular habit of saving in individuals. Even though the minimum amount for such deposits tends to vary from one bank to another, individuals can invest even INR1000.

In RDs, the minimum deposit period is 6 months, and maximum deposit period is 10 years. Rate of interest in RDs is equivalent to what is offered in fixed deposit. Hence, interest rates are higher in comparison to the savings account. 

Periodical payments can be made in recurring deposits by giving standing instructions to the bank to credit RD account every month from the investor’s savings or current account. Average interest rate is between ~6% to ~7% for most of the banks.

Sometimes interest rates in recurring deposit vary on the basis of an investor’s age. For example, senior citizens are offered higher interest rates against existing interest rates for regular RD schemes.

Important factors to check before applying

Term period should be the first element which investors should check before they decide to go for making investments in recurring deposits. Most of the time, there are mainly 3 categories into which term periods are divided. Short-term tenure ranges between 6 months to one-year, medium-term tenure ranges from more than one year to 5 years, and long-term tenure tends to last from more than 5 years - 10 years. It is of utmost importance to check tenure before making an investment.

The next element which investors should check is the interest rate which is being offered. It is very important to consider the interest rate before applying as different banks provide different interest rates on the basis of term periods. Investors should make sure that the interest rate which is being provided should be sufficient enough to meet future goals.

Charges for pre-mature withdrawals should be the next priority. Usually, all banks provide facility of opening RD accounts and these banks also allow premature withdrawal of the same. In case an investor decides to go for pre-mature withdrawal, interest payable should be calculated on the basis of tenure which has been completed. Apart from this, banks tend to charge a penalty for such withdrawal.  Therefore, it is very important to choose a bank which offers a high rate of interest and charges less penalty amount on premature withdrawal.

Types of recurring deposits

RDs for senior citizens carry same features as a regular RD. However, such schemes offer higher interest rates in comparison to regular accounts. Interest rate is compounded quarterly according to the applicable interest rate. Thus, this helps the senior citizens to withdraw higher maturity amount and meet short-term funding requirements efficiently. More often than not, additional interest rates offered by several banks on senior citizen RD schemes tend to range between 0.25% and 0.75% above regular deposit rates.

The second type of RDs is RD for NRI/NRE. These schemes are categorised as one of the best investment options for NRIs. Significant returns can be generated with small recurring monthly investment amount. As an NRI, one is allowed to invest in RDs either through NRE or NRO RD account.

Minor RD account is one another type. These accounts should be opened with the names of individuals who are under 18 years of age. However, such accounts are only feasible under the supervision of parents or guardians. In such accounts too, just like normal RDs, a fixed monthly installment amount and tenure will be specified when the account gets opened. 

RDs tend to offer several advantages to the investors. These instruments can be helpful in fulfilling financial goals and they also provide immunity from the swings which might take place in the interest rates.

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