Recurring Deposits as a Conduit for Wealth Accumulation

Are you looking to grow your wealth steadily and consistently? Opening a Recurring Deposit (RD) account could help you accumulate wealth over time. With their unique features and the power of compounding interest (RD interest is compounded quarterly), RDs can be an effective tool to build long-term wealth, systematically . In this article, we will explore how recurring deposits can help in building wealth over time, and the benefits they offer. 

A Brief Introduction to Recurring Deposit

A recurring deposit is a type of deposit offered by banks and financial institutions in India, where customers are allowed to deposit a fixed amount of money every month for a predetermined period, typically ranging from six months to ten years. The interest earned on these deposits is often at par with fixed deposits (FDs). The interest is compounded and added to the principal amount on a quarterly basis. 

How to make monthly RD deposits? You need to link your RD account to your Savings Account and set-up auto-debit instructions. The amount would be automatically debited from your linked Savings Account and transferred to your RD account on the due date.

Upon maturity, you will receive the total amount deposited along with the interest accrued.

Benefits of Building Wealth with Recurring Deposits

Building wealth with RDs offers several advantages. Here are a few of these:

• Ease of Investment: RDs require small monthly contributions, making them accessible even for individuals with limited funds.
• Disciplined Savings: By committing to regular contributions, RDs help cultivate a habit of saving and instill financial discipline.
• Fixed Returns: The interest rate for RDs is predetermined, ensuring stable returns on your investment.
• Flexibility: Banks like Ujjivan offer flexible tenures ranging from 6 months to 10 years, allowing you to align your investment with your financial goals.

Building Wealth with RDs through Compounding Interest 

One of the key benefits of RDs is the compounding of interest. This concept can best be explained with an example. 

Suppose you are convinced that recurring deposits can help wealth accumulation and you decide to invest ₹5,000 per month in an RD for a tenure of 5 years at an interest rate of 8% per annum. At the end of the tenure, your investment would grow to approximately ₹3,35,000. However, if you were to withdraw the interest earned each month instead of reinvesting it, your maturity amount would be significantly lower at around ₹3,25,000. This demonstrates how compounding interest can accelerate wealth accumulation over time.

Sample Calculation on how recurring deposits can help wealth accumulation:

Let's take another simple calculation and show how recurring deposits can help wealth accumulation. Let's say Rahul decides to invest ₹10,000 per month in an RD for 10 years. The interest rate offered by the bank is 7% per annum. Using a compound interest calculator, we can determine that Rahul's investment will grow to approximately ₹17,60,000 at the end of the tenure.

Table: Growth of Rahul's RD Investment

This example demonstrates how recurring deposits can help wealth accumulation through the power of compounding.

Disclaimer: The above calculation is for illustration purposes only. Ujjivan Small Finance Bank doesn’t take any responsibility for the accuracy of information. 

A Scenario: Wealth Accumulation for a Dream Vacation

Let's consider a realistic scenario to understand how recurring deposits can help you achieve specific financial goals. Priya wants to save for a dream vacation that costs approximately ₹5 lakhs. She decides to invest in an RD that offers an interest rate of 7% per annum. By investing ₹10,000 per month for a period of 4 years and 2 months (50 months), Priya will accumulate approximately ₹5.02 lakhs at the end of the tenure.