Top Features and Benefits of Recurring Deposit

Disciplined saving helps in building a corpus slowly but consistently. One of the investment instruments that instills disciplined savings habit and lets your money grow over time is Recurring Deposits or RDs. They provide a flexible saving option with guaranteed returns, making them an attractive choice for many individuals.

In this article, we will explore the features and benefits of recurring deposits and how they can help you achieve your financial goals. Whether you're saving for a vacation, education, or emergency fund, understanding the flexibility of recurring deposits will empower you to make informed decisions about your savings.

Let's dive in!

Key Features of Recurring Deposits

Recurring deposits are fixed-income investments that allow you to deposit a fixed amount every month for a specific period. Here are some key features of RDs:

1. Low Minimum Investment

   RDs have a low entry barrier, with some banks like Ujjivan allowing investments as low as ₹100 per month.

    

2. Time Period

   You have the flexibility to choose the time period of your RD, starting from as little as 6 months up to 10 years. Please note that though early RD withdrawal is permissible, however, there could be a certain penalty fee, usually capped at 1% pertaining to the interest rate applicable at the time of withdrawal. Ujjivan doesn’t charge any premature RD withdrawal fee for withdrawals made after 6 months from the time of deposit.

    

3. Lock-in Period

   RDs typically have a lock-in period of 30 days to 3 months, during which any premature withdrawals do not earn interest.

    

4. Premature Withdrawals

   While premature withdrawals are allowed, there may be penalties levied by the bank or financial institution. Please refer to point number 2 for more information.

    

5. Loan Facility

   RDs also offer the option to avail of loans against your deposit, providing liquidity when you need it the most. However, not all banks may offer this facility. Please contact your bank for better understanding.

    

6. Interest Calculation

   RD interest in generally compounded and paid out on a quarterly basis. The interest credited adds up to the principal amount, facilitating consistent growth.

    

Benefits of Investing in RDs

1. Safe Investment

   RDs are considered safe investments. Amount up to ₹5 lakh is insured under DICGC (Deposit Insurance and Credit Guarantee Corporation). Additionally, unlike mutual funds, RDs are not market-linked, meaning the interest remains fixed throughout the tenure even if there’s market downturn.

    

2. Higher Interest Rates

   Recurring deposits offer higher interest rates compared to savings accounts. The rates are at par with FD rates. This helps you growing your money in a safe and secure manner. Additionally, senior citizens are eligible for higher interest rates, usually up to 0.5% over and above the normal rates.

    

3. Lump sum Pay-Out

   At the end of the tenure, RDs pay out the maturity amount as a lump sum. This includes your investments and the accumulated interest, which can be used to achieve your financial goals.

    

4. Premature RD Withdrawal Facility

   Let’s say you need emergency cash. You can withdraw the RD amount based on your needs. However, there could be certain terms and conditions regarding the interest rate applicable, taxability and premature withdrawal fee. Check with your bank to know the details before going for RD premature withdrawal.

    

5. Minimal Documents Required

   You need to go through basic KYC process to open an RD account. If you already have a savings account with Ujjivan, you can link it to RD. The RD amount would be auto-debited from the savings account on the due date.

    

6. Easy Management

   You can monitor your RD account from via net banking or bank app. You will get all the details and notifications regarding how much interest is credited and how much amount you have (principal + interest) in the bank app.

    

Calculating RD Interest Rates

Before investing in an RD, it's essential to understand how interest rates are calculated. The formula for calculating maturity value is as follows:

M = P*(1+R/N)^Nt, where M = Maturity amount, P = Principal amount or the installment amount, R = Interest rate in decimal, T = tenure, and N= compounding frequency (since it is usually quarterly, it will be 4). Let's consider an example to illustrate this calculation. Suppose you invest ₹5,000 per month for 3 years at an interest rate of 8%:

Using a Recurring Deposit Calculator, you will receive an interest of ₹24,094, while your maturity amount would be ₹2,04,000.