There is a whole world of investment options out there, with many ways to increase your savings. Fixed deposits and Recurring deposits are among the best ways to mobilize your idle savings and have them work for you.
|Fixed Deposits||Recurring Deposits|
|Purpose: To enable investors to mobilize idle savings and earn with a higher rate of interest than regular savings bank accounts.||Purpose: To inculcate a regular habit of savings among the public.|
|Duration: Fixed deposit accounts can be opened for a minimum of 7 days, to a maximum of 10 years.||Duration: Recurring Deposit accounts can be opened for a minimum of 6 months, and a maximum of 10 years.|
|Eligibility: All resident Indians and Hindu Undivided Families (HUFs) are eligible to open a fixed deposit account.||Eligibility: All resident Indians and Hindu Undivided Families (HUFs) are eligible to open this account. RD accounts can also be opened for minors by their parents or legal guardians.|
Compound Interest and Impact of Compounding Frequency: Interest on investments made in a FD compounds, and earns interest on the new balance after each compounding. The following formula explains this further:
A = Final Amount that will be received P = Principal Amount. r = Annual nominal interest rate. n = number of times the interest is compounded per year. t = number of years
|Compound Interest and Impact of Compounding Frequency: Most banks that offer Recurring Deposit usually compound interest on a quarterly basis. Compound interest is interest that is added to the principal amount so that from then on, the interest that has been added also earns interest. This addition of interest to the principal is called compounding. The following formula gives you the total amount one will get if compounding is done: Where: M = Maturity value. R = Monthly instalment. n = Number of quarters. i = Rate of interest/400.|
Renewals and withdrawals of Fixed Deposit Accounts:
Renewals and withdrawals of Recurring Deposit Accounts:
Nominations under Fixed Deposit Schemes:
Nominations under Recurring Deposit Schemes:
Loan against Fixed Deposit
Loan against Recurring Deposit
Income Tax on FD
Income Tax on RD
It all depends on your needs. A fixed deposit account earns interest in a compounding manner on the initial lump sum deposited. The entire amount earns money for 1 year, but in the case of recurring deposits, the first instalment earns interest for 12 months, the second for 11 months, the third for 10 months, and so on until the end of the deposit term.
In real time, you make more money with a fixed deposit (As illustrated by the below example), but it does not have the flexibility of a recurring deposit account in terms of being able to deposit smaller amounts as and when they become available to you.
|Particulars||Fixed Deposit Account||Recurring Deposit Account|
|Amount invested||Rs.24,000 (lumpsum)||Rs.2,000 (per month for 12 months)|
|Interest rate per annum||9% (compounded quarterly)||9% (compounded quarterly)|
|Total annual interest earned||Rs.2,234.||Rs.1,195.|
|Total account balance after one year||Rs.26,234.||Rs.25,195.|
The difference in total income between Fixed Deposit and Recurring Deposit Accounts is Rs.1,039 – as can be seen in the above example. Both types of accounts have their own benefits and drawbacks, but the bottom line is that you earn more with a Fixed Deposit Account (even though the Recurring Deposit Account allows you to stagger your investments in smaller equal portions).
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