RDs vs Mutual Funds: A Smart Investment Guide

Features of Recurring Deposit (RD)

Here are the features of recurring deposit, a low-risk investment choice: 

1. On average the rate of interest ranges between 5% to 8%, which varies depending upon the bank the investor opts for. 
2. The minimum amount of deposit starts from Rs.10. 
3. Investment tenure ranges from six months to 10 years. 
4. The interest is calculated mostly on a quarterly basis. 
5. This investment choice does not allow mid-term or partial withdrawal. 
6. Recurring deposit allows premature account closure with penalty. 

Benefits of Recurring Deposit (RD)

Recurring deposits are a preferred investment choice due to assured interest in maturity along with minimal risk. Here are a few more benefits: 

1. A recurring deposit is a suitable investment choice for attaining both short- and long-term financial goals, as it offers fixed interest in maturity. 
2. This investment scheme is protected from interest swings caused by changing market trends or bank policies. 

Types of Recurring Deposits

RDs are available in various other types besides the regular scheme:

1. Recurring Deposit for Senior Citizens -  This scheme offers around 0.25% to 0.75% of interest above the regular RD rate. 
2. Recurring Deposit for NRI/NRE - One can invests through Non-Resident Ordinary (NRO) or Non-Resident External (NRE) accounts. 
3. Minor RD Account - This is for individuals under 18 years of age and returns are comparatively higher than regular RDs. 

Recurring Deposit Calculation Formula Explained

Banks in India calculate the returns on RD with the below formula: 

M= R[(1+i) n-1]/1-(1+i)^ (-1/3)]

M- Total maturity value 

R- Monthly deposit amount 

n- Time period (years) 

i- Interest rate 

Eligibility Criteria for a Recurring Deposit (RD)

The eligibility criteria for applying for recurring deposits are: 

1. Any individual can open an RD. 
2. Individuals above 10 years of age can open RD by providing required documents. 
3. Under the guardianship, any individual of 10 years of age or below can open an RD. 
4. Any commercial organisation, company, corporation, or proprietorship can open an RD. 
5. Any government organisation 

Documents Required to Open an RD Account 

The documents needed to apply for an RD account in a bank are: 

1. Application form  
2. Proof of address and identity 
3. Passport size photograph of the applicant 
4. KYC documents 

Mutual Funds 

This is an investment instrument managed by financial experts, also known as Asset Management Company. They invest the capital accumulated from the investors in various financial assets like stocks, equities, bonds, and many more. Here are more details on this

Features of Mutual Funds

The features of this market-dependent investment tool are: 

1. The mutual funds schemes are guided by financial experts who manage the money of the investors. 
2. Investors can invest in either open-end or closed-end mutual funds depending on their suitability, as the former option offers flexibility, while the latter provides a limited time frame. 
3. Mutual funds also extend flexibility for investment. Investors can either opt for lump sum or SIP scheme as per their requirement. 
4.  The mutual fund return is unpredictable, as it changes as per the market trends. 
5. Mutual funds schemes like equity funds come with high risk factors along with high profitability. 
6. Debt funds are low-risk mutual fund schemes and hence, are safer options to invest in. 
7. Investment can be made in different ways such as through a bank, stockbroker, mutual fund distributors, third-party aggregators, branch offices, or online portal. 
8. TDS (Tax Deducted at Source) is not deducted from the mutual fund earnings. 

Benefits of Mutual Funds

Here are the benefits of investing in mutual funds: 

1. Mutual funds are managed by an Asset Management Company (AMC), which offers expert guidance to investors. 
2. This is a cost-effective investment tool. 
3. Investment amount can be as low as Rs.500 if investing through Systematic Investment Plan (SIP). 
4. This investment plan allows investors to switch funds as per their need and suitability. 
5. It maximises the benefit of diversification with minimum risk. 
6. Buying, selling, and redeeming fund units are easy.  
7. Lock-in-period of the close-ended mutual funds does not allow investor to redeem, which ensures long-term gain. 
8. Under 80C of Income Tax Act, ELSS-tax saving mutual funds allows for tax deduction as well as wealth creation. 

Key Differences Between Recurring Deposits and Mutual Funds

The main differences between RD and mutual funds are: 

Types of Mutual Funds 

The diverse types of mutual funds are: 

1. Equity or growth schemes - Investment made in stocks offers high returns and tax benefits but comes with considerable risk factors. 
2. Liquid funds or money market funds - This is a short-term debt instrument that provides reasonable returns. 
3. Fixed income or debt mutual funds - Investment done on corporate or government securities or bonds, both for long- and short-term basis, which offers fixed returns with minimal risk. 
4. Hybrid or Monthly Income Plans (MIPS) - These funds are also known as marginal equity funds, which are ideal for retired individuals or those who are averse to high risk. 
5. Balance funds - This generates high income which helps in stabilizing the risk factor of the equity. 
6. Gilt funds - This is a low-risk investment done on government securities. 
7. Index funds - These funds replicate the market index and the risk associated is proportional to index fluctuations. 

 How Returns are Earned from Mutual Funds

The mutual fund returns are not always received in cash, these are also calculated in value appreciation. Here are the ways in which returns are received: 

1. Dividend -  Investor can opt for monthly, quarterly, half-yearly, or yearly dividend payout, and reinvest the dividend in mutual funds as well. 
2. Capital gain - This is the income received when a particular security is sold out and this is also considered as return on investment. 
3. Net Asset Value - This is the price paid by the investor for a single unit of fund, which determines the performance of the fund. Higher NAV will yield higher income when some or all units of the fund are sold out. 

Eligibility Criteria for Investing in Mutual Funds 

The criteria that investors must fulfil for investing in mutual funds are: 

1. Applicants need to be an existing account holder of the specific bank. 
2. Investors must be KYC compliant 
3. The status of savings bank account should be single or survivor. 
4. Bank account holders must sign the account opening application form. 

Documents Required for Investing in Mutual Funds 

Here are the vital documents needed for an individual to invest in mutual funds: 

1. Application form (filled with basic details) 
2. KYC needs to be done 
3. Passport size photograph of the investor 
4. Identity proof- Aadhar, Voter card, PAN card or Passport 
5. Address proof- Aadhar, Voter card, Driving License or Passport