A fixed deposit or term deposit is one of the safest and most popular forms of investment in India. It has been traditionally seen as a reliable way of investing money, with none of the volatility and risks associated with other investments like the stock market. It is simple to open a fixed deposit and requires minimal documentation.
A fixed deposit (FD) is a financial instrument that offers a higher interest rate when compared to interest earned in a regular savings account. If you have some extra money and wish to invest it in a low-risk opportunity, a fixed deposit is a good option. Fixed deposits are offered by banks, financial institutions and corporates.
Basic features of a fixed deposit
Interest rate: The interest rate varies from bank to bank depending on
i. The amount deposited.
ii. Period of deposit.
iii. Senior citizen eligibility.
In India, senior citizens enjoy a higher interest rate on their Fixed Deposits.
Period: A fixed deposit – as the name suggests – is for a fixed term, and could range from 7 days to 10 years. On maturity of your deposit, you are paid your original deposit amount plus the interest earned.
Amount: The amount to be invested can be deposited only once. If you want to invest any additional amounts, you will need a new FD account.
Maturity: On maturity, the amount is credited to the customer’s specified bank account (if it issued by another financial institution or a corporate).
Withdrawals: Sometimes, if you have an urgent need for the money, or if you spot a better investment opportunity, you might want to break your FD and withdraw the entire sum before the maturity date. If you withdraw your FD before the maturity date, you will need to pay a penalty.
In other cases, you might only want to make a partial withdrawal – i.e. remove only a small amount of your total deposit. In such cases too, you will be charged a penalty and paid interest only on the remaining amount.
Renewals: On maturity, an FD can be renewed for a different tenure, or it can be auto-renewed in the absence of specific instructions.
Tax: You can invest your money in tax-saving fixed deposit schemes. However, keep in mind that you will need to keep your FD for a minimum number of years if you choose to invest in such a scheme.
What is a Recurring Deposit?
A Recurring Deposit (RD) is a form of a term deposit which allows you to deposit a fixed amount on a regular basis and enjoy the same higher interest rate as a fixed deposit. The difference between an RD and an FD is that a recurring deposit allows you to make periodic investments in the deposit, whereas in a fixed deposit, you need to deposit the entire amount at the time of opening the FD account. An RD is a way to encourage saving among individuals who may not be able to spare a lump sum to open an FD, but prefer to invest smaller amounts on an ongoing periodic basis.
You can deposit the money in an RD with a standing order with your bank so that your savings account is automatically debited for the pre-determined amount and credited to your recurring deposit on a monthly basis. You are credited with the entire amount (principal plus interest) on maturity of the deposit.
Features of a Recurring Deposit:
The interest rates on recurring deposits can vary according to each bank. However, once you open an RD, the rate remains the same for the entire period of the deposit. In general, the recurring deposit interest rates are the same as the FD rates and can range from 6%-9% depending on the individual bank.
While the interest rate is the same for the period of the recurring deposit, compounding is done on a quarterly basis.
Senior citizens can enjoy a higher interest rate on RDs.
Period and amount
Period: The minimum period for an RD is generally 6 months though some banks can have a minimum period of 2 years. The maximum period for a recurring deposit is 10 years.
Amount: The minimum amount to be deposited on the periodic basis also depends on the bank.
Some banks may allow you to make a premature withdrawal subject to specific terms and conditions and after paying a penalty fee. Banks do not, in general, allow partial withdrawal, but offer it in the form of an overdraft or loan facility, with the balance in the RD being held as collateral.
In addition to resident Indians, some banks also allow minors to have an RD account under the supervision of a guardian.