FD vs RD- Comparison between fixed deposit and recurring deposit

Picture this. You've been tracking the market movements, and the volatility in the prices of securities has left you quite alarmed. Considering the uncertainty in the current market phase, you decide to look for investment avenues that are more stable. In other words, you want to put your money in a scheme that does two things–

• Protects your capital
• Offers guaranteed¹ returns

If this is your current investor profile, you, like some conservative investors out there, may be considering the two popular safe investment avenues we have in the market, namely a fixed deposit and a recurring deposit.

Despite being conventional investments that offer assured returns, fixed deposits and recurring deposits are very different from one another. Let's take a closer look at what each of these investment schemes are, and how they are different.

A fixed deposit, commonly abbreviated as an FD, is a kind of investment option that is offered by banks and non-banking financial companies (NBFCs). Also known as term deposits, they are among the safest and popular traditional investment schemes available today. Although it is advisable to open an FD account with a bank that you already have a savings account with, it is not always necessary.

When you start an FD, you deposit a lump sum amount in your FD account. This investment is made for a predetermined tenure. Over this period, you will earn interest on the amount you deposited, at a predetermined rate of interest.

A recurring deposit (RD) is another investment scheme that is popular among conservative investors. They are also among the safest investments available in India today. However, unlike FDs, recurring deposits do not require a lump sum investment. As the name indicates, RDs involve periodic deposits of small sums over a specified tenure.

The amount deposited in the RD account continues to accumulate interest over the investment period. At the end of this tenure, you will receive the total amount you invested, as well as the total interest earned thereon. This sums up the basics of how a recurring deposit works.

Although they both offer guaranteed1 interest at predetermined rates, fixed deposits and recurring deposits are very different from one another. Here is a closer look at the key differences between these two investment options.

• The nature of investment:
  Fixed deposits require a lump sum investment amount upfront. However, in the case of recurring deposits, you only need to deposit small sums every month. You need not shell out a huge sum of money in the case of an RD.
• The minimum investment amount:
  The minimum amount you can invest in a fixed deposit or a recurring deposit typically varies from one bank to another. However, broadly speaking, you need a minimum of Rs. 5,000 to open a fixed deposit account. In the case of recurring deposits, monthly investments can begin at as low as Rs. 10.
• The investment tenure:
  You can open a fixed deposit account and keep your investment intact for a period ranging from 7 days to 10 years. The tenure for recurring deposits, on the other hand, can range from 6 months to 10 years. This makes both FDs and RDs suitable for people with short term, medium term and long term financial goals.
• Suitability:
  Banks typically have their own eligibility criteria for individuals who wish to open fixed deposits or recurring deposits. However, if you want to look at the aspect of suitability, FDs are better suited to individuals who have a bank account as well as a lump sum amount ready for investment. RDs, on the other hand, are ideal for people with a regular source of income.
• The rate of interest:
  The rate of interest on fixed deposits and recurring deposits varies from one bank to another. However, given the same rate of interest, a fixed deposit will typically earn you more interest than a recurring deposit. This is because in an RD, the capital is deposited in instalments over the investment tenure. But in an FD, the lump sum is deposited upfront, and therefore, you earn interest on it throughout the tenure.
• Interest payout:
  In a fixed deposit, you can choose to receive your interest as periodic payouts, made on a monthly, quarterly, semi-annual or annual basis. Alternatively, you can choose to reinvest the interest in the FD, in which case the total interest will be paid out to you at the end of the investment tenure.

In an RD, you cannot choose to receive periodic interest payouts. The interest on a recurring deposit is paid out only at maturity, along with your capital.

So, given the many points of difference between a fixed deposit and a recurring deposit, which one should you choose? Here is a quick set of pointers to guide you.

A fixed deposit would be ideal for you if–

• You have a lump sum amount ready to be invested
• You want to earn guaranteed¹ returns on your capital
• You have a bank account
• You need a regular source of additional or alternate income

A recurring deposit would be ideal for you if–

• You have a small sum remaining from your earnings each month
• You want to invest those small sums in a safe manner and earn assured returns
• You do not have a lump sum amount at hand

This should give you a better idea of how fixed deposits and recurring deposits differ from each other. They each have their own unique features and advantages. And depending on your financial situation and your goals, you can choose the right option for your portfolio. If you can afford to, you can even invest in an FD and simultaneously start an RD. That way, you can enjoy the benefits of both these schemes.