- What is a recurring deposit?
- Benefits of a recurring deposit scheme
- Who should consider investing in a recurring deposit?
Financial products typically seem like a complicated and intimidating subject to most people from backgrounds other than finance. And yet, a visit to the bank and the experience of opening our first bank account as a minor is a quintessential childhood experience for most. As such, recurring deposits are very likely a familiar concept as well.
But without delving too deep into the intricacies of personal finance, how can an investor determine whether a recurring deposit scheme is a good investment for them or not? Read on to find out.
Term deposits are an indispensable part of services provided by banks and counted among the safest investment instruments, given that interest income is more or less assured.
A term deposit is a broad term that includes fixed and recurring deposits and refers to when the customer essentially locks up his/her money for a fixed time frame.
As the name suggests, anyone opening a recurring deposit chooses to invest a pre-specified amount of money at a recurring predetermined frequency, typically a month, until maturity. Upon maturity, the investor receives his/her capital along with whatever interest the deposit earned.
A comparison between a fixed and recurring deposit, where the term, total investment, and interest rates are all the same, a fixed deposit will earn a higher interest amount compared to a recurring deposit scheme.
However, recurring deposit schemes are an excellent product for you if you cannot afford to make a huge investment and would instead likely break up your investment into installments.
Recurring deposits can range anywhere between a couple of months to years. Different banks offer their customers varying flexibility on the minimum amount for recurring deposit, at what frequency, and the interest rate an investor can earn on the deposit scheme.
Every bank has its policy for premature withdrawal or closing a recurring deposit scheme. Typically, a customer wishing to shut down his/her deposit scheme may lose out on some interest payout and have to pay the penalty.
Before determining whether a recurring deposit scheme is a good choice for our respective investment portfolios, it is necessary to understand its benefits.
A crucial aspect to securing your financial future is the ability to keep expenses lower than income, thereby saving as much as possible in your professional life. It is also important to invest those savings wisely to have enough to meet financial goals during our lifetime—whether owning a car or house, meeting marriage expenses, kid’s education, or retirement.
Achieving all the above-mentioned financial goals may seem like a monumental task but can be a reality if financial discipline is practiced early on in your career. As such, recurring deposit schemes provide an excellent opportunity to develop healthy financial habits. Moreover, banks today allow standing instructions to automatically debit a pre-specified amount from your savings and credit it to your recurring deposit account so that there is little chance of you missing a payment.
You can opt for various recurring deposit schemes of varying maturities to plan for and meet specific future financial goals.
Most importantly, however, recurring deposits are considered among the safest, low-risk investment products with an almost guaranteed return on your investment.
Provided you know the rate of interest offered by a bank and the tenure of the proposed recurring deposit scheme, several online RD calculators can help determine how much you will earn on your principal investment and what the final lump sum payout will be.
However, beyond knowing how much one will earn on a recurring deposit, it is advisable to compare the interest rates across banks for similar maturity to ensure you get the best interest on offer.
Meanwhile, the same bank can also offer different rates based on whether your deposit is for a shorter period or of longer maturity. Recurring deposits that mature after a couple of years earn a lower rate of interest.
Another aspect to consider before purchasing a recurring deposit is to examine the penalty the bank proposes to charge you to withdraw from the scheme prematurely.
After discussing the recurring deposit scheme in detail, it is now time to find out for whom it is ideal. The range of varied investors based on their financial needs are as follows.
Professional life is limited, and you should try to save as much as possible while you still have a steady income to depend on.
And the more effectively you invest the savings, the better it can serve you. For example, with recurring deposits, you can ensure to save a significant chunk of your income well before you can spend it on something frivolous.
To begin with, you can calculate your expenses and determine what amount is left each month. You could then set up a standing instruction with the bank to debit your savings account the same day as or within a few days of receiving your salary. Here you set aside money without thinking about it.
Small businesses are difficult to run and face several challenges, which happen when your business may not incur enough sales to meet expenditures or have lower margins than more established businesses, impacting overall income. As such, a recurring deposit is an ideal low-risk instrument for small businesses to earn something extra in case of a particularly great couple of months.
It is never too early in life to learn about financial discipline. Teaching a child to save money is an important life lesson a parent or guardian can teach. Children enjoy taking care of their affairs from a young age. Encouraging students to open accounts and setting aside a part of their pocket money every month towards a recurring deposit scheme is an educational experience.
If your intention as a responsible investor is to practice financial discipline, there is no better instrument than a recurring deposit. These are also ideal if you can only afford to save a specific small amount each month. It is good to remember that no matter how small a gesture each month, the result will be amply satisfying.