Recurring deposits are one of the most popular and widely used instruments for investment. It is a form of FD, with the difference being that instead of there being one lump sum investment in this form, the investor is supposed to deposit a pre-decided amount every month or quarter. A particular interest rate is also decided for the period of the recurring deposits. The duration of these deposits can range from around six months to 10 years, while the interest may vary for different intervals.
Recurring deposits are one of the essential services that are provided by all the banks, many financial institutions, and also the Post Office. What interests many people in investing in recurring deposits is that investments as low as Rs.500 can be made per month in these funds. At the same time, the financial institutions themselves guarantee these deposits, and they do not hold any risk while garnering a fair interest rate. If these deposits are held with discipline for a long enough time, then the investor's capital accumulation and compounding lead to a decent corpus.
As a safe form of investment, recurring deposits serve as an excellent investment for risk-averse investors, who do not wish to undertake the risk of constant fluctuations and even negative returns in the equity market. The investor can deposit the same amount every month or quarter without monitoring anything. Earlier banks were thought to be the sole option for making a recurring deposit, but these days even NBFCs or non-banking financial companies have started offering these services.
Looking at some of the benefits of recurring deposits:
One thing that should be kept in mind while investing in recurring deposits is that they are just like FDs for withdrawals. Meaning that withdrawal cannot be done before the specified tenure, which is decided by the investor itself in the beginning. If the investor still wishes to withdraw the funds before the term is over, they are liable to pay some fine, which is a percentage of the deposited amount. Also, there is no option for making a partial withdrawal in the case of recurring deposits, and only a lump sum withdrawal can be made at the end of the tenure.
Since the maturity of recurring deposits can be after more than two years also, only the long-term capital gains taxes would be applied in those cases. This leads to tax savings since it would not be taxed like regular income. Also, interest income of less than Rs.10,000 is not taxed in any financial year.
While we try to dig into the functioning of the same, let us look at the types of Recurring Deposits.
Sometimes recurring deposits do not seem like an ideal option for investment because of the meagre interest rates that they offer compared to the other options available in the market, such as debt funds or equity funds. But nowadays, NBFCs are offering recurring deposits at rates much higher than those offered by banks. For example, leading banks are offering regular recurring deposits at interest rates ranging from 5.50% to 6.50%, while the Shriram City Finance group (an NBFC) is offering its Recurring deposit at a staggering 8.50% interest rate (for 60 months). Even though the difference between 6.50% and 8.50% seems to be only 2%, differences show up when this is compounded for a long period.
For example, if someone invests Rs.2000 every month for 10 years at 5.5%, they'll be withdrawing Rs. 3,20,041, but if the same person invested the same amount at 8.5%, they'd end up withdrawing Rs. 3,77,656. This means that just a 3% difference in the interest rate can lead to a nearly 20% difference in the final amount. The difference in returns keeps on compounding with the longer interval; this means that even a small difference in interest rates can be hugely beneficial for investors.
Investing in an NBFC like Shriram is entirely safe since it has a track record of the past 45 years to show while having sold nearly 5,000,000 customers during this period. Its Recurring deposits have a "MAA+/ with Stable Outlook" rating by ICRA (Indicates high credit quality). Shriram is setting a new trend by offering such high-interest rates on recurring deposits, which can be highly beneficial for prudent investors who like to earn regular interest on their money while keeping their risk to the minimum.