Most Indians are habitual savers and prefer investing to grow their capital. Moreover, many of them are risk-averse and opt for financial plans that offer risk-free returns. This has made fixed and recurring deposits popular among Indian investors.
What are recurring deposits?
When you open a recurring deposit (RD) account, you invest a fixed amount at regular intervals either in a bank or a non-banking financial company (NBFC). Generally, the tenure is between six months and ten years. RDs offer a fixed interest rate, and you may choose to receive the interest periodically or withdraw the principal plus interest on maturity.
What are fixed deposits?
When you invest in fixed deposits (FDs), the tenure and interest rates are pre-determined. You may invest a lump sum for a fixed period, which ranges from one to five years. The interest earnings are payable either at regular intervals or added to the principal and paid on maturity.
Differences between FDs and RDs
Although RD and FD rates are similar and you can take a loan against the deposit, some key differences between both options are discussed below:
1. Investment purpose
If you want to invest a small amount at regular intervals, you may opt for an RD. It allows you to earn some returns on your savings while helping you inculcate investment discipline.
But FDs are a better choice if you want to invest a lump sum, which may be lying idle in your savings account. You can also choose FDs if you want to invest a one-time income like a bonus and earn high returns in the long run.
2. Investment horizon
Every investor has unique requirements and a different investment horizon. If you want to put a lump sum for a few years to earn high returns, a cumulative fixed deposit can be a great option. The interest is reinvested, allowing you to earn compounded returns, which help you build wealth over the long term.
On the other hand, if you want to invest a small amount regularly to meet short-term financial goals, you may opt for RDs.
3. Investment returns
Generally, the FD interest rates are similar to the RD rates. However, FDs offer higher returns because the interest is received on the entire principal over the complete tenure.
In comparison, in the case of RDs, the interest is earned regularly, which means the first installment earns interest for the entire duration while the other installments earn interest for the proportionate tenure.
Both types of deposits are fixed-income securities and entail similar interest rates. However, if you have a sizeable amount to invest in, FDs are a suitable option as they offer higher returns in the long run. Mahindra Finance offers competitive interest rates on FDs and to check eligibility, tenure, rate of interest, and FD documents required, visit their website today.