Fixed deposits (FDs) and recurring deposits (RDs) are two low-risk investment schemes offered by financial institutions. More people in India prefer these investment options to PPF, mutual fund SIP or NSC because FD and RD are not subject to market fluctuations and risks.
However, besides this similarity, there are certain distinguishing factors you must consider to invest in the right scheme. Check those below!
6 differences between FD and RD
- Investment frequency
Here, you need to invest a lump sum amount to open a fixed deposit account. Generally, the minimum amount that you can deposit is Rs. 25,000
As the name suggests, RDs require a recurring investment. You need to deposit a fixed sum of amount every month in your RD account. Failing to pay this due amount will result in a penalty.
Some financial institutions also require their customers to deposit a lump sum initially.
- Rate of interest
The rates of interest on FDs can be up to 8.75% or even more. Some NBFCs offer an additional rate of interest of up to 0.25% to those who renew their accounts. Plus, senior citizens can also receive up to 0.35% additional interest over the standard rate.
Interest rates on RDs are generally lower than FDs. These rates can go up to 7.65%. Senior citizens can also receive 0.5% higher rate of interest than the standard rate.
- Investment tenor
The investment tenor for FDs usually ranges from 12 – 60 months. The lump sum amount that you invest will stay locked-in for that period. However, you can break the FD in case of financial emergencies against a premature withdrawal charge.
Recurring deposit investment tenors can go up to 10 years. You need to keep investing the due amount every month for that period.
- Interest payment frequency
There are two types of FDs you can opt for: cumulative and non-cumulative. Cumulative FDs give you returns only after their maturity. Non-cumulative FD can provide you with interest on a monthly, quarterly, half-yearly, or yearly basis.
Recurring deposits only give you returns after their maturity.
- Credit rating
Fixed deposits usually have credit ratings on them which certify their stability and safety. For example, the Bajaj Finance Fixed Deposit is rated MAAA by ICRA and FAAA by CRISIL, thereby, ensuring that this FD will give you guaranteed returns.
Recurring deposits usually don’t come with such credit ratings. However, they are a safe investment option.
- Loans against investment
NBFCs like Bajaj Finserv enable you to take a loan against your FD account. You can avail secured loans of up to 75% of your cumulative FD amount and 60% of your non-cumulative FD. The repayment tenor for the loan ranges from 90 days to up to the maturity period of the investment.
Eligible applicants can enjoy quick approval and disbursal of their loan against minimal documentation. Also, you don’t incur any charges when you part pre-pay or foreclose the loan.
A few financial institutions offer the option to take a loan against your recurring deposit too.
The bottom line is a fixed deposit can be a better investment option when compared to a recurring deposit. Use an FD calculator online before you invest. This calculator will help you to determine your returns beforehand based on the deposit amount, tenor, interest payment frequency, etc.