What is Recurring Deposit: Features, Benefits, and How to Invest

What are Recurring Deposits?

Recurring Deposit (RD) is a popular investment option among risk-averse investors who prefer a fixed income with minimal risk. An RD account allows individuals to deposit a fixed amount of money every month and earn interest on it, similar to a Fixed Deposit (FD). The key difference is that with an RD, deposits are made regularly, making it a disciplined savings option. Here, we will explore the features, benefits, and other critical aspects of recurring deposits.

Features of a Recurring Deposit Account

1. Fixed Tenure: RD accounts come with a fixed tenure ranging from 6 months to 10 years. The tenure must be decided at the time of opening the account.
2. Monthly Deposits: Investors must deposit a fixed amount every month. The amount is predetermined and must be adhered to throughout the tenure.
3. Interest Rate: The interest rate on RDs is usually similar to that of Fixed Deposits and is compounded quarterly. The rate remains constant throughout the tenure.
4. Premature Withdrawal: Premature withdrawal is allowed but comes with a penalty. The interest earned will be lower compared to the rate applicable for the actual period the deposit was held.
5. Loan Against RD: Some banks offer loans against the balance in the RD account. Typically, 80-90% of the RD balance can be availed as a loan.
6. Nomination Facility: Most banks provide a nomination facility for RD accounts, ensuring the funds are transferred to the nominee in case of the account holder's demise.

Returns on RD – Interest Earned

The returns on a Recurring Deposit depend on the interest rate offered by the bank and the tenure of the deposit. Interest rates typically range from 5% to 8% per annum, compounded quarterly. The formula for calculating the maturity value of an RD is:

A = P * (1 + r/n) ^ (nt)

where:

• A represents the maturity value (total amount you receive at the end)
• P represents the monthly installment amount (fixed amount you deposit regularly)
• r represents the annual interest rate (expressed as a decimal)
• n represents the number of times interest is compounded in a year (usually quarterly, so n = 4)
• t represents the tenure of the RD in years

Eligibility for a Recurring Deposit

1. Individuals: Both resident and non-resident Indians (NRIs) are eligible to open RD accounts.
2. Minors: Minors can open RD accounts under the guardianship of a parent or guardian.
3. Organizations: Some banks allow businesses, firms, and other organizations to open RD accounts.

Important Factors to Check Before Applying for Recurring Deposit

1. Interest Rates: Compare the interest rates offered by different banks. Even a slight difference can impact the maturity amount significantly.
2. Penalty for Premature Withdrawal: Understand the penalty charges for premature withdrawal. This varies from bank to bank.
3. Minimum and Maximum Deposit Limits: Different banks have different minimum and maximum deposit limits. Choose one that fits your financial capability.
4. Tenure: Select a tenure that aligns with your financial goals. Longer tenures generally offer better interest rates.
5. Tax Implications: Interest earned on RD is taxable. Understand the tax implications and consider TDS (Tax Deducted at Source) if applicable.

How to Open an RD Account Online

1. Visit Bank’s Website: Go to the official website of the bank where you want to open the RD account.
2. Log In: Log in to your net banking account.
3. Select RD Option: Navigate to the ‘Recurring Deposit’ section and click on ‘Open RD Account’.
4. Fill in Details: Enter the required details such as deposit amount, tenure, and nominee information.
5. Verify and Submit: Review the details, verify with OTP (One-Time Password), and submit the form.
6. Confirmation: After successful submission, you will receive a confirmation message or email.

How to Open an RD Account Offline

1. Visit Branch: Visit the nearest branch of the bank where you want to open the RD account.
2. Fill Application Form: Request and fill out the RD application form.
3. Submit Documents: Submit necessary documents like ID proof, address proof, and passport-sized photographs.
4. Deposit Amount: Deposit the initial installment amount at the counter.
5. Receive Passbook/Receipt: After processing, the bank will provide a passbook or receipt as proof of the RD account opening.

Types of Recurring Deposits

1. Regular RD: Standard RD accounts where fixed amounts are deposited monthly.
2. Flexible RD: Allows depositors to vary the monthly deposit amount, offering more flexibility.
3. Senior Citizens RD: Special RD accounts for senior citizens with higher interest rates.
4. NRE/NRO RD: For Non-Resident Indians, allowing them to invest in Indian RDs with attractive interest rates.

Benefits of RD Investment

1. Disciplined Savings: Encourages regular savings and instills financial discipline.
2. Fixed Returns: Offers assured returns, making it a low-risk investment option.
3. Compounding Interest: Interest is compounded quarterly, leading to higher returns over time.
4. Loan Facility: Easy access to loans against the RD balance.
5. Flexibility: Various tenures and deposit amounts to choose from, catering to different financial needs.
6. No Market Risk: Unlike mutual funds or stocks, RDs are not affected by market volatility.

In conclusion, a Recurring Deposit is an excellent investment option for those looking to save regularly and earn assured returns. By understanding its features, returns, eligibility criteria, and the factors to consider before applying, individuals can make informed decisions and effectively utilize RDs as a part of their financial planning strategy.