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7 May 2020

All You Need to Know About FD & RD


The only certain thing about life is uncertainty. The unpredictable future haunts us. But what we can do is prepare for the uncertain future. One of the most crucial preparations is financial planning. It's very important that while we enjoy our present, we also save for our future.

When it comes to investment, we often get skeptical due to the risks involved in the returns. But investing in FD and RD are some of the safest and easiest investment options available. 

What is FD?

Fixed Deposit (FD) is one of the investment options where you can deposit a lump sum amount for a particular period of time. Once the money is invested, it starts earning an interest depending upon the time for which money is invested. FD interest rates vary between 3% to 9.25%.

Benefits of FD

The benefits of the FD are endless. Some of the major benefits are-:
  • Zero or no risk leading to assured payments- Fixed deposit involves zero or no risk and is unaffected by market fluctuations. Since FDs involve almost no risk there is a surety of the assured payment without any loss of the principal amount.
  • Easy to Withdraw- Though the bank charges a small penalty on early withdrawal withdrawing can be done easily anytime.
  • Comparatively High rate of interest- FD interest rates are comparatively higher than the regular saving accounts as interest in saving accounts varies between 0% to 7%. Whereas the interest rates on FD vary between 3% to 9.25%.
  • Flexible Tenure and Payment- FD can be opened for as less as seven days which makes its tenure flexible. Also, FD gives you the option to choose how you wish to receive interest. You can choose to be paid annually, monthly, or during maturity.

What is RD?

Recurring Deposit or RD is an investment option where you have the option to deposit the amount regularly, and you earn interest on that deposit.

Benefits of RD

  • Zero risk- RD also involves zero or no risk and is unaffected by market fluctuations.
  • Do not require a lump sum amount- Unlike FD, you don't need a lump sum amount or a huge amount. You can deposit the amount monthly.
  • No penalty if you miss a month- If you fail to deposit the amount in a month there is no penalty charged.

FD vs RD: Which option to choose?

Consider a situation where A opens an FD of Rs. 24,000 @ 7.2% for two years. After two years, the maturity amount will be Rs. 55410. Now, if A opens an RD of Rs. 2000 @ 7.2 % for two years, then after two years, the maturity amount will be Rs. 51771.

Even though the interest rate remains the same, the return is more in FD than RD. The return in FD is more than RD is because in the case of an FD the entire amount earns the interest every month whereas in case of RD only the first installment earns the interest for the complete duration of the RD and the rest of the amount earns interest after it is deposited. In other words, the second installment earns interest only for 11 months, the third one for 10 ten months, and so on.

Therefore, if you have an option to deposit a lump sum amount, you must prefer FD over RD, whereas if you don't have enough money to invest at one go, you can choose RD.

Both FD and RD are secure and assure good payment, but one can choose FD or RD according to their needs.

Things to know before investing in FD and RD

Some of the factors that one should look at while opening an FD or RD are the following-:
  • Interest rates: Before opening an FD or RD, you must be well informed about the interest rates prevalent in the market.
  • Tenure: The minimum and maximum tenure of both RD and FD vary. Hence, you should choose the tenure according to your short-term or long-term goals.
  • Tax applicability: The interest earned on FD and RD is taxable. Therefore you must consider the tax that you will be required to pay.
The benefits of FD and RD make them stable investment options. Also, investing in FD and RD are not only secure but are also very useful during emergencies. Moreover, it inculcates saving habits in us. So, the earlier you invest in an RD or FD, the better will be the benefit.

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