Planning on making a start on those financial planning resolutions? No matter what the amount, financial planning reaps big dividends in the long run, even if you’re starting out with a measly Rs.100 a month. Putting that Rs.100 every month into a recurring deposit would help you save big and earn from those savings. How, you might ask?
A recurring deposit is a financial tool where investors deposit a predetermined fixed sum of money each month for a predetermined period of time. On maturation of that period, the entire lump sum along with interest is handed back to the investor.
A recurring deposit works similar to a fixed deposit, where investors earn through their deposits.
The difference between the two is a fixed deposit requires you to deposit a large sum of money all at once, whereas a recurring deposit requires you to make monthly instalment payments for a certain period of time.
The interest earned through a recurring deposit is the same as that earned through a fixed deposit, thus making it a good way to start saving and building capital.
Recurring deposits can be short term as well as long term.
A long term recurring deposit can run up to a maximum of 10 years, with the interest on the principal compounded each quarter.
Planning For Your Short Term Goals Through Long Term Recurring Deposit
A recurring deposit is a good way to save up for any financial goals you may have. As a fixed amount is being deducted from your bank account each month, the onus of saving a portion or setting money aside is already taken care of.
As you can choose the amount you wish to deposit into the recurring deposit account every month, you have the flexibility of setting an amount of your choice. in the case of meeting a long term financial goal, you can break up a large investment into smaller parts through monthly deposits.
For example, if you are saving for your child’s higher education or a related expense, you can calculate an approximate amount you will require and plan your recurring deposit accordingly. As you would also have more immediate expenses, selecting a long term recurring deposit would be a good idea as you can start saving a small amount from the beginning. You can select a tenure up to a maximum of 10 years, at the end of which you will receive not only the principal but also the accrued interest, making for a significant amount.
Tenure and Minimum Amount for Long Term Recurring Deposits
A long term recurring deposit has a maximum tenure of 10 years as per banking guidelines. A long term recurring deposit is usually over 5 years, compared to the regular recurring deposits, which range from 3-5 years.
A long term RD keeps your money locked for the duration of the deposit, which is why you should plan wisely since the penalties associated with a premature withdrawal are quite steep.
Another point to keep in mind is ensuring you have sufficient funds in your account, as the predetermined amount will be deducted on a fixed day each month. In case of fund shortage, most bank levy a late payment charge which varies.
Different banks have different rates regarding the minimum deposit amount for a long term recurring deposit. For example, some banks have a minimum deposit amount of Rs.10, whereas it is Rs.100 for others. All banks stipulate that amounts have to be in multiples of Rs.100 over and above the minimum deposit.
Eligibility Criteria For Long Term Deposit
Individuals looking to open a recurring deposit have to meet certain eligibility criteria as laid down by each bank.
Most banks would require individuals to open a savings account with them so that transferring the interest amount is easy and hassle free for the individual.
Apart from eligibility criteria, there are certain documents to be submitted to the bank to when applying for a recurring deposit. The list of documents is given below:
- Proof of identity.
- Proof of address.
- Passport sized photographs.
Long Term Recurring Deposit Interest Rates
Long term recurring deposits are offered by a number of banks, with each bank offering a different interest rate depending on the deposit tenure. The below table mentions a few of these rates for specific tenures for both regular deposits as well as the those opened by senior citizens:
Long Term Recurring Deposit Interest Rates (Calculated At % P.A.)
|ICICI Bank||SBI||HDFC||Axis Bank|
|Tenure||Reg||Sr Cit||Reg||Sr Cit||Reg||Sr Cit||Reg|
|Above 5 years – 8 years||7.25||7.75||7||7.25||7.25||7.75||7.25|
|8 years – 10 years||7.25||7.75||7||7.25||7.25||7.75||7.25|
Please Note: the rates mentioned above are as per the information available on August 3rd, 2016. Please check with the bank for any changes/modifications in the rate at the time of application.
As given above, a long term recurring deposit offers reasonable interest rate and can be considered a good first step or addition to anyone’s financial planning portfolio.