We have financial goals like buying a car, a house, retirement planning, etc. And to achieve those disciplined saving is most important. So if you aim to save a corpus of money by keeping aside a fixed amount of your earnings every month and also earning interest while doing so, Recurring deposits can be a good option.
Recurring Deposits are like a monthly saving scheme where you pay a fixed amount monthly for a fixed tenure. Upon completion of the predecided tenure, you get the accumulated principal amount and the interest amount.
Feature of Recurring Deposit
1. Risk Profile
RDs are low-risk investment instruments that give you assured return upon maturity.
2. Minimum Anount
You can open an RD account with a minimum investment of Rs. 500 to a maximum of Rs 10,000.
You can choose the tenure of the RD based on your requirements. With a minimum of 6 months up to 3-4 years.
4. Interest Rates
The rate of interest is decided based on the tenure of your RD
5. Institutes offering
Almost all the banks, NBFCs, and post offices provide this investment option
Anyone above the age of 10 years can open an RD account. And minors less than 10 can open under a legal guardian.
The interest gain in RDs is considered Income and is taxed under the income tax slab.
Interest rate and tenure for Recurring Deposit?
Various banks and post offices offer interest rates similar to fixed deposits. The interest rates on RDs range from 5% – 7.5 %, compounded annually.
For senior citizens, the interest rates offered are at least a percent higher than regular interest rates.
The benefit of Recurring deposits is seen in long tenure since the interest rate is compounded annually or quarterly based on the scheme we choose.
To understand, let us consider the following example where Rs. 1000 is deposited monthly for the following year at a 6% interest rate compounded annually.
|Principal Amount||Period||Rate of Interest||Maturity amount|
|Rs 1000||1 year||6%||1060|
|Rs 1000||2 years||6%||2183.6|
|Rs 1000||3 years||6%||3374.61|
Withdrawal of an RD amount
If you urgently need the money, you can withdraw the amount before maturity. In this case, the bank charges a 1% penalty and deposits the remaining amount in your account. There is no option for partial withdrawal. Thus upon premature withdrawal, the RD ends.
Banks also provide loans against your RD of an amount up to 90% of the amount in the RD. The interest rate charged is around 1% above the interest on recurring deposits.
How to open a Recurring Deposite Account Online?
- Log in to your Neo bank app.
- Choose the ‘Open an e-RD account’ option.
- Specify the account number to which the installment should be debited, the amount of the installment, and the duration. Check the applicable interest rate and make a note of the nominee for the account funds.
- After you’ve checked the maturity amount, click the checkbox to confirm that you agree to all of the terms and conditions.
- Send in your application. A confirmation message will be displayed, and an email with the RD receipt will be sent to the registered email address.
- The stated amount will be deducted from the selected account every month.
When should you invest in RDs?
Recurring deposits come under low-risk investments. The interest we receive is assured and can be easily calculated using the above formula. This gives RD the upper hand when considering secure investments without or with less risk.
Also, if you are in the initial stage of starting your investment journey and not sure about investing in other complicated investment instruments, then RD can be the best starting point for your starting stage.
Thus, these are the three cases when investing in RD becomes a good decision:
- When you want to save money for short-term goals
- When you are in the initial stage and have yet to learn about other investing instruments.
- When you don’t want to invest in high-risk options such as stocks or mutual funds that depend on market risk.
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