
Recurring deposits or RDs are popular investment instruments. Investors can choose from several financial institutions such as banks, post offices, and even NBFCs for starting these deposits. This instrument is made for the general public with the minimum amount required for investing in these deposits, starting from as low as Rs.500 per month. The ease with which these deposits can be opened by anyone in the respective bank or a nearby post office makes it ideal for any person looking to create a corpus for the long term.
The main benefit of recurring deposit or RD being a popular investment option in India is that it provides a shallow risk investment tool that assures returns. It also gives the customer the flexibility to choose the amount to be invested, the frequency with which the investor would like to invest, and the tenure for which the investment is to be made. This tenure mostly lasts from nearly six months to 10 years. By making these small deposits, the investors can create a substantial saving if they can put aside a specified amount every month or quarter as fixed even though the deposits are relatively small when they add up.
The power of compounding shows that the investor can expect a decent return for his investment within a few years. These savings can be used for fulfilling the long-term goals of the person. People should understand the power of small savings and compounding and not ignore making these small investments.
To make this clear, let's take an example. If you invest Rs.6241 monthly for ten years and add the current expected annual return of around 5.5%, then you would end up making 10,00,00 rupees. So, as you see, a relatively small tiny-looking amount invested in a disciplined manner every month can raise a massive fortune for you in the future.
Even though Recurring Deposits may provide a lower return for your savings during some periods, it separates you from the risk associated with the equity or the debt market. The returns in the Recurring Deposits are ensured by the bank or the financial body that the investor may have initiated an RD with. Whereas the same cannot be said about the volatile equity market, which can give even negative returns during specific periods, even in the case of the Corporate Debt, there is a chance of default by the company, which can lead to substantial capital loss. Therefore, the safe investor must have some form of their income saved in the form of a fixed return instrument. Even if the person invests in both fixed income instruments like Recurring Deposits and stocks, that would be great since the investor would not be putting their entire corpus at risk.
All in all, it can be said that Recurring Deposits or RDs are a foolproof way of creating a long-term corpus for yourself. It has stood the tests of time and still is an excellent option for capital appreciation at a fixed rate. The fixed return offered by the scheme removes the burden of constant monitoring. It can be left alone while depositing decided amounts monthly or quarterly to reap the fruits of compounding at the end.
Since recurring deposits are an instrument for long-term investments, no short-term taxes are applied yearly. This leads to savings in taxes as only the long-term capital gain tax is not applied to them. But a TDS is applied to the yearly interest at 10% if the interest income exceeds Rs. 10000. There is a one-off tax charge of 20% on the withdrawal amount for long-term capital gains.
The mode of investment is easy to understand and quickly to implement. This is one of the staple investment options for all classes and ages. Parents can start them for their children for their future higher education purpose. In contrast, to build their future and become independent, young people can create one for meeting their long-term financial goals. The elderly can invest in them to get a fixed return at the end of the period for their expenses while keeping the capital amount safe & sound.