Understanding The Difference Between Interest Rates on FDs and RDs

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Interest Rates

At times, investors get confused between Fixed Deposits (FDs) and Recurring Deposits (RDs), while considering their investment goals. Both the investments are types of Term Deposits, enabling a risk-free investment. Also, both yield a fixed rate of return from the investment for a specified period of maturity. Though both instruments are similar in nature, they are different when it comes to interest rate calculation and some other features and benefits.

Differences between Fixed Deposits and Recurring Deposits

  1. The rate of interest: Interest rate varies from one institution to other institutions depending on the term of maturity. Though both fixed and recurring deposits are part of term deposits, they differ with respect to interest rate calculations.

FDs are more befitting than RDs when it comes to interest earnings. As FDs provide you with lumpsum investment, so the entire sum earns the interest. But in RDs first installment earns interest for 12 months, the second installment for 11 months and so on.

Here is a comparison between the FD Vs RD Interest Rate

Tenure

(a)

FD Amount

(Rs)

(b)

Interest earned 8.75% (Bajaj Finance FD)

(Rs)

(c)

FD Maturity Amount

(Rs)

(d)

RD Amount p.m

(Rs)

(e)

Interest earned on RD 8.75%

(f)

RD Maturity

(g)

Difference

(h)

(d-g)

1 year40,0003,64343,6433,0001,68437,6845,959
2 year70,00013,33483,3343,0006,66678,6664,668
3 year1,30,00038,8621,68,8633,00015,2341,23,23445,629

The table is based on the assumption that FD rates are as per Bajaj Finance FD and RD rate by any financial institution.

You will receive Rs 43,643 in FD for maturity of a year while in RD you will receive Rs 37,684. Thus the RD in a year will earn Rs 5,959 less than an FD. This difference increases when we invest Rs 1,30,000 in FD for a period of 3 years and Rs 3,000 per month in an RD for 3 years.

Rates differ with cumulative and non-cumulative options. Rates in an RDs scheme may vary according to schemes may it be for a student, senior citizens, and others.

  1. Purpose: Fixed deposits enable investors in mobilizing their idle cash to earn a higher return as compared with other risk-free investments offered.

Whereas, a recurring deposit inculcates a discipline of saving among investors.

  1. Tenor: Maturity term of fixed deposits ranges from 7 days to 10 years. While recurring deposits maturity period ranges from 6 days to 10 years. Both offer a long span of investment.
  1. Mode of Investment: Fixed deposit offers lumpsum investment. But in the case of a recurring deposit, periodic payments for principal amount are made till the maturity.
  2. Deposit options: With fixed deposits, you can avail various schemes according to your investment criteria: regular FDs, Tax-Saving FDs, and Senior Citizen FDs. You can also choose between cumulative and non-cumulative options, depending upon your preference for earning interest payouts.

Recurring deposits do not provide such benefiting schemes and options for investments.

You should build a fixed income portfolio of both, fixed and recurring deposits. While you can look at a fixed deposit for tax saving, a Recurring Deposit can offer a system to invest periodically with discipline.

The difference in interest rates occurs owing to the difference in time periods available for compounding in recurring and fixed deposits.

Fixed deposits offered by Bajaj Finance come at 8.75% of return with 0.35% extra benefit for senior citizen and an additional 0.25% on renewals. You can invest online via Experia-your online fixed deposit account. These deposits are highly credible as they have been certified by CRISIL and ICRA.

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