There are many types of saving investments that you can make with the help of either a bank or a non-banking financial institution. Fixed Deposits (FD) and Recurring Deposits (RD) are two such instruments which are popular among investors and promote savings in day to day life.
In a fixed deposit, a lump sum amount is placed in a deposit made for a fixed period of time, and at a fixed rate of interest. An RD differs from an FD as it requires a monthly investment. Both these amounts are available on or before the date of maturity, with penalties levied in case the amount is withdrawn prematurely. Loans can be taken against the entire amount of a fixed deposit, and on 80-90% of the value of a recurring deposit.
Fixed Deposits vs. Recurring Deposits – A Value-Based Debate
FD and RD are made to deliver maximum profits to the customer. They are free from the perils of market fluctuations as they are term deposits made with an institution. The returns are guaranteed in both deposits. Therefore the question arises, which of these investment instruments is more beneficial for you?
We can answer this question by looking at a comparative of the benefits that arise from both these investments:
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Returns
An FD can be set up for a term of preference. Some non-banking financial institutions such as Bajaj Finance allow their customers to choose from options where interest is paid at a monthly, quarterly, or biannual basis. The interest then compounds.
Bajaj Finance FD offers 8.60% to customers, with additional percentages available to senior citizens and long term investments. However, the amount of interest paid on an RD is lesser as compared to an FD because the term of an RD becomes shorter with each subsequent month passing, while the term of an FD remains the same.
For a better understanding: An RD for 12 months will incur interest on this tenor in the first month. The interest will be calculated on 11 months in the second month, and so on.
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Tenor
The tenor of an investment can be chosen from a wide range. Bajaj Finance Fixed Deposits provides deposits to be made for anywhere between 12 to 60 months. This makes an FD more flexible, and profitable as multiple investments can be made for various tenors. This allows for you to benefit from the averaging of changing interest rates with every financial year, which in the end leaves you with a higher payout than an RD.
Recurring deposits can be made for tenors which are between 6 months to 10 years.
However, recurring deposits are usually made for smaller savings and tenors, resulting in a minimal accumulation of long term wealth.
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Tax Benefit
Tax is deducted from the earnings of both fixed, and recurring deposits if the interest earnings exceed Rs.40, 000. The calculation of income can be done before making the deposit through online FD calculator available on Bajaj Finance website.
A 5-year tax saving fixed deposit is available with NBFCs like Bajaj Finance, which is exempt from taxes. This instrument is low on risk, and simply locks in your savings for five years and then attains maturity, exempt of being taxed in comparison to an RD.
Fixed deposits are the clear winner in this value-based comparison, as they provide higher returns for the same amount, more flexibility of tenure, and laddering options which are possible due to the compounding of the entire amount at the same rate.
