Recurring deposit (RD) are like term deposits offered by bank and post office across the country, with a fixed amount deposited periodically. It is one of the safest investment options for risk-averse investors. The term deposits are classified into 3 categories: A short-term RD has a duration of six months up to a year, the medium-term usually last from a year to 5 years while long-term is from 5 years to 10 years. Ideally, one should invest in RD having a higher interest rate with a shorter duration. Also, one should look for premature withdrawal charges and opt for the bank that charges a low penalty on premature withdrawal.
Any individual can open an RD account with any bank or post office for a duration of 6 months to 10 years. As competition is very intense, newly opened banks are offering more interest rates as compared to well-established banks, thus helping the investors to earn extra on maturity.
The primary feature of the RD is that the interest rate will remain unchanged till the maturity. On maturity, the investor will receive a lumpsum amount, which includes the periodic investments and interest incurred on time.
Let’s discuss why should you invest in recurring deposits and factors to be considered while opening an RD:
Develops savings habit
An RD generally inculcates a regular saving habit among the investors. The rate of interest is equivalent to fixed deposits. Generally, banks do not allow the closure of RD, however, if the investor insists the account is closed with a penalty for premature withdrawal.
Serve as a Collateral
Investors can take a loan against the RD by using it as a collateral. One can avail up to 90% of the deposit as a loan.
Safe investment option
The investment is safe and secure as the interest rate is fixed and depending upon the tenure, the bank will credit the interest, which will be credited into investors’ account on maturity. However, one should opt of higher interest rates, which ranges from 4%-8% per annum. The important point to note is that the banks offer yearly interest while interest rates on RD offered by post office are compounded on a quarterly basis. For the medium-to-long term, the interest rates are higher and the investor also earns higher maturity amount.
To conclude, a recurring deposit is an ideal option for investors who are looking for risk-free financial instruments, and for a shorter duration.