Fixed Deposit (FD) vs Recurring Deposit (RD)
5paisa Research Team Date: 23 Apr, 2024 10:58 AM IST
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Content
- What is a Fixed Deposit?
- What is a Recurring Deposit?
- FD vs RD – A Comparison
- FD vs RD – Which is Better?
- Comparison of FD rates
Fixed Deposits (FD) and Recurring Deposits (RD) are two popular savings instruments. FD involves depositing a lump sum for a fixed term, earning higher interest rates compared to regular savings accounts. Ideal for one-time, substantial investments, it provides stability and predictable returns. RD suits regular, disciplined saving, allowing monthly deposits with interest rates similar to FDs. It's perfect for those with consistent income who can commit to periodic contributions, building savings gradually. Both FD and RD offer secure investment options, but differ in their flexibility and deposit arrangements.
What is a Fixed Deposit?
A Fixed Deposit (FD) is a financial instrument provided by banks that offers a higher interest rate than regular savings accounts. Investors deposit a lump sum amount for a fixed period, which could range from a few months to several years. The interest rate remains constant throughout the term, regardless of market fluctuations, ensuring predictable returns. Upon maturity, the investor receives the principal amount along with the accrued interest. FDs are a popular choice for risk-averse individuals looking for a safe investment option with guaranteed returns.
What is a Recurring Deposit?
A Recurring Deposit (RD) is a savings tool offered by banks that allows individuals to deposit a fixed amount of money every month into their RD account, earning interest similar to fixed deposits. The term of an RD can vary from six months to ten years, depending on the bank's offerings. At the end of the term, the depositor receives the total amount saved plus the interest earned. RDs are ideal for those who wish to build savings gradually through regular contributions, providing a disciplined approach to saving with predictable returns.
FD vs RD – A Comparison
|
|
Fixed Deposit (FD) | Recurring Deposit (RD) |
| Investment Type | Lump sum deposit | Monthly installment deposits |
| Interest Rates | Generally higher than savings accounts; fixed for the term | Similar to FDs; fixed for the term |
| Deposit Term | Ranges from a few months to several years | Typically from 6 months to 10 years |
| Capital Investment | Requires a substantial initial amount | Smaller, periodic investments over time |
| Flexibility | Less flexible; early withdrawal usually penalizes with lower interest | More flexible in terms of investment amount and sometimes allows penalty-free withdrawals |
| Suitability | Best for those with a lump sum to invest for a fixed period | Ideal for individuals who prefer to save gradually with consistent monthly deposits |
| Risk | Low risk; fixed returns | Low risk; fixed returns |
| Returns | Higher potential returns due to compound interest on a larger principal | Accumulates returns gradually; effective for building savings through regular contributions |
| Premature Withdrawal | Generally allowed with a penalty reducing interest rates | Some banks offer withdrawal with a penalty, affecting interest rates |
| Tax Implications | Tax deductible up to a certain limit under 80C; TDS applicable | No tax benefit; TDS applicable |
FD vs RD – Which is Better?
Here’s a comparison in table form to determine which investment—Fixed Deposit (FD) or Recurring Deposit (RD)—might be better suited for different financial needs and situations:
|
|
Fixed Deposit (FD) | Recurring Deposit (RD) |
| Initial Investment | Requires a lump sum, suitable for those with a significant amount to invest at once. | Requires small, periodic amounts, beneficial for those with regular income but limited lump sum capital. |
| Interest Rates | Usually offers slightly higher rates compared to RDs, maximizing returns on larger amounts. | Interest rates are similar to FDs, but the compounding effect is less due to periodic deposits. |
| Investment Flexibility | Less flexible; early withdrawals often incur penalties reducing earnings. | More flexible with periodic contributions; some plans allow changes in deposit amount and frequency. |
| Risk and Returns | Low risk with fixed and predictable returns, ideal for conservative investors. | Low risk; returns are predictable but accumulated gradually, suitable for disciplined savers. |
| Financial Goal | Best for achieving a lump sum financial goal, like funding a major purchase or investment. | Ideal for long-term saving goals, such as building a fund for future expenses or investments. |
| Ease of Saving | Requires ready availability of funds. Less manageable for those without immediate capital. | Easier for individuals to manage as it spreads the financial burden over time. |
| Tax Benefits | Tax benefits under Section 80C (in some cases); interest is taxable. | No specific tax benefits; interest is taxable, similar to FDs. |
The choice between FD and RD depends on your financial situation, goals, and investment capacity. FDs are better for immediate, higher interest earnings on a lump sum, while RDs are more suitable for building savings gradually without initial financial strain.
Comparison of FD rates
Below is a comparison of Fixed Deposit (FD) rates offered by various banks as of the most recent data available. This table gives an overview of the interest rates for different tenure options:
|
|
1-Year Rate | 2-Year Rate | 5-Year Rate |
| State Bank of India | 5.5% | 5.6% | 5.8% |
| HDFC Bank | 5.6% | 5.8% | 6.1% |
| ICICI Bank | 5.4% | 5.5% | 5.75% |
| Axis Bank | 5.6% | 5.75% | 6.0% |
| Kotak Mahindra Bank | 5.2% | 5.4% | 5.6% |
| Canara Bank | 5.4% | 5.5% | 5.7% |
| Punjab National Bank | 5.3% | 5.4% | 5.6% |
| Bank of Baroda | 5.5% | 5.7% | 5.9% |
This table illustrates how FD rates can vary by bank and by deposit term. Generally, longer terms offer higher interest rates. Rates are indicative and can vary depending on the amount deposited and the specific terms offered by each bank.
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Frequently Asked Questions
Generally, Fixed Deposits (FDs) offer slightly higher interest rates compared to Recurring Deposits (RDs) due to the upfront investment of a larger lump sum, which banks can use immediately, providing them with more capital to work with.
No, the interest rates for Recurring Deposits (RDs) are usually similar to those of Fixed Deposits (FDs), but FDs often offer slightly higher rates due to the lump sum investment, which banks find more financially advantageous.
The choice between investing in FDs, RDs, or PPFs depends on your financial goals. FDs offer short-term, higher interest earnings, RDs allow gradual savings buildup, while PPFs provide long-term investment with tax benefits and higher returns over an extended period.
Anyone with a regular income looking to build savings gradually through disciplined, periodic contributions can invest in a Recurring Deposit (RD). It's ideal for individuals who prefer a structured savings approach.
Withdrawal policies for Recurring Deposits (RD) vary by bank. Generally, early withdrawals are allowed but may incur penalties, reducing the interest earned. Some banks may offer more flexible terms, so it's important to check specific bank policies.