What makes a fixed deposit different from a recurring deposit
- Difference between Fixed Deposit and Recurring Deposit
All commercial banks provide a facility of depositing amounts into banks through various ways. These deposits are further utilised by the bank for further investment and to provide loans or used as liquid funds, depending on the nature of deposits. Following are the two types of deposit that are offered by commercials banks:
- Fixed Deposit Account
- Recurring Deposit Account
Both the deposit accounts have specific and defined features of working. The intent behind both the accounts of deposit is distinctive, and thus there are certain differences in their working.
The difference between Fixed Deposit and Recurring Deposit are mentioned as follows:
- Amount of investment required: The amount of investment required in case of a fixed deposit is lump sum (gross) amount, since it is like a one-time investment, with aggregate amount. In case of recurring deposit, the amount is invested in a recurring format, with a specific amount at specific intervals.
- Minimum tenure: The minimum tenure in case of fixed deposit is around 7 days and in the case of a recurring deposit, it is around 6 months, since the idea behind such a deposit is to develop a saving habit and thus it is at least 6 months.
- Return on investment (ROI): Since in case of fixed deposit investment is of high amount, Return on investment in case of a fixed deposit compared to a recurring deposit is high. On the other hand for recurring deposit, it is a recurring amount at an interval, resulting in the investment being low as compared to Fixed Deposit and thus, the ROI is accordingly low.
- Target account holders: Fixed Deposit benefits account-holders who have heavy amounts, for example retired persons, whereas a recurring deposit grinds effectively for people who have low amounts to invest but require some returns; for example, homemakers, students, etc.
- Intent of action: The intention behind a fixed deposit is to earn a return on their heavy amounts as invested. On the other hand, the intention behind a recurring deposit is to set some amount aside out of the total income in the form of savings and accrue some returns on savings.
- Rate of interest on investment: The rate of interest differs for each commercial bank. However, the rate of interest in comparing fixed deposits and recurring deposits is around 3.5% to 5% and 5% to 8%, respectively.
- Investment method: The investment method in case of a fixed deposit is generally through cheque, NEFT (National Electronic Fund Transfer), RTGS (Real time Gross Settlement). In case of a recurring deposit, it is mostly through ECS (Electronic Clearing System), cheque, or NEFT.
- Mid withdrawals: Mid withdrawal is generally allowed in case of a fixed deposit with a certain amount of penalty in cases as may be applicable. However, in case of a recurring deposit, mid withdrawals are generally restricted by most commercial banks, since withdrawal will defeat the intention of this deposit. It may also be allowed by certain Commercial Banks with some restrictions.
- Taxability: The taxability in the case of both a fixed and recurring deposit is on the interest earned on such investment. But comparatively, the taxability on a fixed deposit is higher since the intention is purely to earn income from sources, and considering lump sum and heavy amount return will also be high, as compared to RD.
- Defaulting factor: Since a fixed deposit investment is a one-time investment, there are low chances of default from the user. However, recurring deposit account holders generally may default. Thus, commercial banks have the right to cancel such recurring deposits if the account holder defaults on the investment for six consecutive intervals.
- Maturity amount: Users of the Fixed Deposit account have the advantage to withdraw interest or have it credited to their account each month, in which case such an account-holder will receive Principal amount at Maturity. However, if the user does not withdraw such interest, the full amount (Interest + Principal) will be received at maturity. In case of a recurring deposit, since mid withdrawals are restricted, the RD account-holder receives (Interest + Principal) always.
- Loan facility: The loan facility is generally available in both cases, up to a specific value of the investment amount. However, practically, taking a loan in case of a fixed deposit is easier than with a recurring deposit. This is because the amount of a recurring deposit is comparatively low, and the terms and conditions of commercial banks may or may not allow them to provide a loan facility, as the case may be.
- Auto-renewal: Auto renewal refers to the facility wherein, after one period of investment is over, it automatically renews as invested for the next upcoming period. This facility is allowed for fixed deposits, whereas, for a recurring deposit, it is generally limited.
- Minimum deposit: Depending upon the commercial bank, generally a minimum deposit restriction is placed on fixed deposits. Since the amount of investment for Fixed Deposit is lump sum or gross amount, while for Recurring Deposit comparative to Fixed Deposit it is much smaller as savings can be started with the smallest amount, thus minimum deposit is lower for RD than FD.
- Tax saving benefit: Tax saving benefit schemes are available in the case of fixed deposit. However, very limited or no options are available for availing of tax saving benefit in case of recurring deposits.
- Frequency of investment: The frequency of investment in case of a recurring deposit generally is monthly or quarterly. In case of fixed deposits, it is a one-time investment. Since FD has a large amount, it gets fixed as a one-time investment thus it is not as frequent as Recurring Deposit.
- Separate passbook record: There is a specific record maintained by the bank in case of recurring deposits to keep track of the investment frequency and amount from account-holders. However, there is no specific passbook record maintained for a fixed deposit; since it is a one-time amount, no such tracking is required.
- Certificate issuance: The bank issues a fixed deposit certificate as a receipt to the account-holder and as proof stating the amount invested. This mentions details of rate of interest, period, interest amount, and investment amount. On the other hand, very rarely is such a certificate issued for a recurring deposit. Typically, such details are mentioned in the passbook or any statement, if issued.
- Bank statement record: In case of a recurring deposit, commercial banks also provide facility of issuing bank statements to the recurring deposit holder to oversee details of running the recurring deposit. In case of a fixed deposit, since the certificate mentions all the details, no such bank statement is required for deposit-holders.
- Earning opportunity: The earning opportunity in case of fixed deposit is fair but it requires a heavy amount to be invested. Generally, with respect to FD v/s RD, investment is low in RD thus the earning opportunity is not so evident.
- Customised schemes: Many commercial banks provide customised schemes in case of recurring deposits, such as Bal Vikas Deposit Scheme, Yuva Bachat Plans, Senior Citizen Bachat Yojana, and many other named schemes that offer greater benefit in case of recurring deposits. Fixed deposits also have such schemes, but generally have higher rate interest advantages than any other benefit.
- Lock-in period: Fixed deposits, in the case of many commercial banks, have lock-in-period restrictions on withdrawals. A lock-in period mostly consists of 5 years, 10 years. In case of Recurring Deposit, mid withdrawal is restricted thus no question arises for lock-in-period, the scheme itself locks the amount in RD until maturity.
- Investment marketability: Since the amount as invested by the Fixed Deposit holder are heavy amounts and with lock-in period these amounts are easy to invest in long-term investment plans by the commercial banks, In case of Recurring Deposit account holders, the amounts are small, thus these are generally used as liquid funds by the commercial banks.
Thus, based on preferences and benefits one should choose their applicable deposit in a more effective and efficient way. Each deposit has its specific features, which make it unique. If one requires to save more and earn, he/she requires to choose RD, if one has a good amount to invest in and is ready to wait for a specific period he/she should invest in FD.
Thus, one should choose their preferred deposit based on the above mentioned merits and limitations.