Bank FD vs. Bank RD. Which is a better option?
Bank Fixed Deposits (FDs) and Recurring Deposits (RDs) are relatively safe investment options. FDs and RDs are safer than equities as they are not market linked and provide a fixed rate of return. However, many conservative investors are confused when it comes to choosing between these 2 options. PersonalFN is of the view that before you invest in either of these, it is necessary to understand them perfectly.
Bank Fixed Deposits
Bank FDs are term deposits where the investor makes a lump sum investment and earns a higher rate of return in comparison to a savings account, for a specified period of time. At present, the rate of interest on 1 year bank FDs - ranges from 7.75% to 8.75% per annum. The interest earned on FDs is taxed as per one’s income tax slab on accrual basis. If the interest amount exceeds Rs 10,000, the bank would deduct tax at source (TDS) at the rate of 10% p.a.
Bank Recurring Deposits
Bank RDs are also type of term deposits where the investor makes regular and fixed investments every month and earns a rate of return which is similar to those offered by Bank FDs, for a specified period of time. The interest earned on RDs is taxed as per one’s income tax slab on accrual basis, but there is no tax deduction at source.
Now you must be wondering, what is the basic difference between bank FDs and bank RDs?
The difference between bank FDs and bank RDs is the returns earned. Bank FDs generate higher returns and thus accumulate greater wealth for the investor as compared to Bank RDs. This is mainly due to the fact that in a FD, you invest a lump sum amount, which earns interest for 1 entire year (or 12 months). However, in a RD, only the 1st deposit earns interest for 12 months. The 2nd deposit earns interest for 11 months, the 3rd for 10 months and so on. The compounding effect enables bank FDs to generate higher returns for the investor.
What should you do?
PersonalFN believes that the availability and the need of funds should determine which option you should opt for. If you have a lump sum amount which you want to invest, then you may consider bank FDs as they generate higher earnings for the investor as compared to bank RDs. Even while investing in an FD, you must not be too casual in your approach and analyse the product in detail.
On the other hand, if you are a salaried employee, you may be more comfortable in making small and fixed investments every month. Hence, in such a case, a RD would be a more suitable choice. PersonalFN is of the view that in case you have a higher risk appetite, then you can also consider Systematic Investment Plans (SIPs) in equity mutual funds. SIPs not only instil in you the habit of saving regularly but also enable you to earn higher returns vis-à-vis a bank RD over a longer time horizon.
PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.
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