Market Volatility? Invest in Recurring Deposit

October 2024 was plagued by the equity market downturn. Nifty fell by more than 2000 points. Investors lost crores of rupees. When faced with such adverse situations, it's good to have your money invested in an instrument that promises stable and secure returns. When we think of such investment vehicles, two options that come to mind are Fixed Deposits and Recurring Deposits. 

Understanding Recurring Deposits (RDs)

Recurring deposits are one of the safest investment options available to investors. Unlike fixed deposits, where you invest a lump sum amount, RDs require you to make periodic deposits, usually monthly, for a pre-determined tenure. The interest is compounded quarterly and paid out at the time of maturity. 

One of the significant advantages of recurring deposits is that you can start investing with a relatively low sum of money. For example, you can start investing in Ujjivan Recurring Deposit with as low as ₹100 per month. RD tenure ranges from 6 months to 10 years.

Advantages of Investing in Recurring Deposits

Investing in recurring deposits offers several advantages:

1. Disciplined Investing: RDs encourage individuals to develop a habit of regular savings by requiring them to deposit a fixed amount each month. This instils discipline and helps cultivate a saving culture.

    

2. Low-risk and Guaranteed Returns: RDs are considered low-risk and provide guaranteed returns offering peace of mind to investors aiming to achieve short- and long-term goals while prioritising capital preservation.

    

3. Higher Interest Rates: RDs offer higher interest rate compared to Savings Account. Since the interest is compounded quarterly, you can get higher returns at the time of maturity.

    

4. Fixed Interest Rate: Recurring Deposits are not market-linked. The interest rate remains fixed till maturity (unless you opt for premature withdrawal) and is unaffected by market volatility.

    

5. Flexibility in Deposit Amount and Tenure: RDs provide flexibility in terms of deposit amounts and tenure. Investors can choose a deposit amount that suits their financial capability and select a tenure based on their financial goals. This flexibility allows individuals to customise their RD investments to their specific requirements.

Managing and Maximising RD Returns

To maximise your returns with recurring deposits, there are several strategies you can implement:

1. Choose the Highest RD Interest Rate: Different banks offer varying interest rates on RDs. It's worth comparing rates and choosing the one that provides the best returns. Investing in recurring deposits with longer tenures often comes with higher interest rates.

    

2. Align RD Maturity Dates with Financial Goals: By staggering the maturity dates of multiple recurring deposits, you can create a consistent income stream or have funds available for specific purposes. This approach allows you to take advantage of the interest earned while maintaining liquidity. You can use Ujjivan Recurring Deposit Calculator to get an estimate of your RD returns.

    

3. Systematic approach to depositing and reinvesting: Set a fixed amount to deposit regularly into your RD account, aligning it with your financial capabilities and goals. By maintaining a disciplined approach, you can gradually build your savings and benefit from the power of compounding. Upon maturity of an RD, consider reinvesting the principal amount along with the interest earned into a new RD or other investment avenues for continuous growth.

Recurring Deposits vs Stock Market Investments

Mr. Patel's RD Journey: A Fictitious Illustration

Let's consider a scenario to understand the benefits of recurring deposits during market volatility. Mr. Patel, an individual looking to save for his child's education, decides to invest in recurring deposits during market volatility instead of the stock market due to its stable returns.

Mr. Patel starts a recurring deposit with a monthly deposit of ₹10,000 for a tenure of five years at an interest rate of 7.20%. At the end of five years, he would have accumulated approximately ₹6,61,000, including interest.

In contrast, if Mr Patel had invested the same amount in the stock market during a volatile period, he might have experienced significant fluctuations in his investment value and potentially faced capital erosion.

This scenario highlights how recurring deposits can provide a haven during market volatility and ensure stable returns for specific financial goals.

Disclaimer: The above example is for illustration purposes only and should not be considered as an investment advisory.