Our banks have become the home to all finances. Digital transactions and digital money are how we use cash in 2024. There used to be a time when money was saved in jars, closets, and more. Today, the bank makes it all much easier than you think. There are a few other ways the bank allows you to save and grow your money simultaneously. How is that? That is, through fixed deposits and recurring deposits.
However, the main confusion that arises here is about which option is better, FD or RD. We are here to answer that question for you.
First, let’s get straight with our Diwali Gifts.
Table of Contents
What is a Fixed Deposit?
A Fixed deposit is when an individual deposits a lump sum amount into the FD account for a fixed period of time, as the name suggests. This lump sum amount earns some percentage of interest over the fixed time frame.
How Does a Fixed Deposit Work?
A fixed deposit works similarly to a savings bank account; however, the money is locked in for a specified period of time, usually 7 days to 10 years.
The locked-in money will also earn a percentage of interest during its time in the FD account. You can usually calculate the interest earned through an FD calculator to determine your returns. For instance, if you choose the State Bank of India for your FD, you can use the SBI fixed deposit calculator to determine the returns you would earn on your FD investment.
What is a Recurring Deposit?
A recurring deposit is when you make frequent deposits into an RD account. An FD deposit can only be made once, whereas the deposits in an RD account are recurring, as the name says. However, this deposit amount can only be withdrawn after the maturity period, i.e., after the end of the tenure.
How Does a Recurring Deposit Work?
In an RD account, you will have to deposit a fixed amount between frequent intervals. RD accounts will also earn a certain percentage of interest throughout the period. The investor needs to decide the time frame of the deposits and how much he is willing to invest at every interval, and the bank will give you the amount of interest you earn over these deposits. You can also use an RD calculator to calculate the returns you can make through the RD account based on your chosen bank.
What is Better: Fixed Deposits or Recurring Deposits?
Making a choice between the best options can be more tedious than one might think, but there are certain ways to make this decision a little less tiresome.
Tips to know what is the better choice for you:
- What are Your Financial Goals?
Your financial goals are the most important deciding factor when it comes to choosing between these two options. If your financial goals are in the long term, you can make sure that an FD would come in handy. But that would not be the only thing that you have to consider.
You need to consider –
- If your goals are long-term or short-term first.
- How much money do you have at the moment, and how much will you make every month?
- You need to know which has the better return rate of interest.
- Would you need to withdraw the money anytime soon?
- Do you have any other investment choices?
- What is the risk you can take with your investment?
If all your answers align with FD, you know the answer, and vice versa. For instance, no lumpsum amount means you would have to choose an RD investment to make small investments at frequent intervals.
- What is the Amount You Can Invest?
If you have a lump sum amount. Let’s say you just sold a property, and you have Rs. 50,00,000 in hand. You can re-invest the other 40,00,000 in real estate, stocks, and gold. For the other Rs. 10,00,000, you can simply invest in an FD for a period of 10 years. You will earn handsome returns every year. You can also claim up to Rs. 1.5 lakhs of tax deductions on this investment scheme.
At the moment if you do not have a lump sum amount, you can always choose an RD account. This investment will let you deposit a certain sum of money every month and earn interest on the sum as you deposit.
- Which Option Gives You Better Returns?
This is a highly subjective question when asked in general. But, if you ask yourself this question, you will understand that it is impactful.
For instance, if you have Rs. 10,00,000 and invest it for 10 years at the rate of 7.7%, your returns would be Rs. 21,44,020.
If you had the choice of investing Rs. 10,000 each month for a period of 10 years at the rate of 7.7%, your returns would be Rs. 18,05,718.
Now, you can see if the two options are giving you higher returns.
- What is the time frame for your Investments?
If your investment horizon is shorter, you should choose an RD account instead of FDs since FDs are known to give better returns in the long term.
- Do You Already Have an Emergency Fund?
Emergency funds are essential for anyone. If you already have an emergency fund, you can lock your funds in the long term into a fixed deposit. If you do not have an emergency fund, you can choose to put half your money as an RD and the rest as a short-term emergency fund that you can withdraw at any time.
Conclusion
After you have asked yourself these questions and answered them, you can decide which option is the better choice for you. The only thing you need to do is ask yourself these questions.