FD Vs RD: Which is the Better Investment Scheme?

When it comes to securing your financial future, Fixed Deposits (FD) and Recurring Deposits (RD) are two popular choices. Both offer stability and assured returns, but they differ in their structure and benefits. This article will delve into the comparison to determine which option suits your financial goals best.

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What is a Fixed Deposit?

A Fixed Deposit (FD) is a type of investment option offered by banks and financial institutions. In an FD, you deposit a certain amount of money with the bank for a fixed period, ranging from a few months to several years. 

During this period, the bank pays you a fixed FD interest rate on your deposit, which is usually higher than the interest offered on a regular savings account. The interest rate remains constant throughout the tenure of the FD, hence the term "fixed" deposit. 

At the end of the maturity period, you receive your initial deposit along with the accumulated interest. FDs are considered low-risk investment options and are popular among investors who seek stable returns over a predetermined period.

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What is a Recurring Deposit?

A Recurring Deposit (RD) is a type of investment scheme offered by banks where you can regularly deposit a fixed amount of money at specified intervals, typically monthly, for a predetermined period. 

The main feature of an RD is that you contribute a fixed sum regularly, and at the end of the maturity period, you receive your initial deposits along with the accumulated interest.

The RD interest rates are generally similar to those for Fixed Deposits (FDs), and they vary depending on the bank and the tenure of the RD. 

FD Vs RD: Which is Better?

The following table compares Fixed Deposit and Recurring Deposit (FD and RD) across various criteria to help you determine which option may be better suited for different financial goals:

Criteria Fixed Deposit (FD) Recurring Deposit (RD)
Initial Investment Lump sum amount Regular monthly investment
Tenure 7 days to 10 years 6 months to 10 years
Interest Rate 6% - 9% p.a. 3% - 8% p.a.
Maturity Period Fixed term Fixed term, usually shorter than FD
Flexibility Less flexible, locked until maturity More flexible, allows monthly contributions
Interest Payment Paid at maturity Compounded or paid periodically during the term
Penalty for Early Withdrawal Typically incurs a penalty for premature withdrawal Usually, there is no penalty, but it may affect interest earnings
Risk Generally low risk Generally low risk
Purpose Suitable for those with lump sum savings Suitable for those with regular income
Returns Generally, higher returns due to higher interest rates Lower returns due to lower interest rates

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You May like to Read: SBI Fixed Deposit Vs Post Office Term Deposit Schemes

FD or RD: What Should You Choose?

Choosing between a Fixed Deposit (FD) and a Recurring Deposit (RD) depends on your savings goals and financial situation. Let us have a look at the features:

Fixed Deposit (FD) Recurring Deposit (RD)
  • Ideal for: People with a lump sum amount to invest.
  • Benefits:
    • Potentially higher interest rates compared to RD.
    • Option for cumulative FDs where interest is compounded for better returns.
    • Some banks offer a loan facility against FD.
  • Drawbacks:
    • Requires a lump sum investment upfront.
    • Less flexible - early withdrawal may incur penalties.
  • Ideal for: People who can save regularly and do not have a lump sum.
  • Benefits:
  • Inculcates a savings habit through regular deposits.
  • No penalty for missed instalments (though it reduces the maturity amount).
  • Interest rates are comparable to FDs for some tenures.
  • No TDS (Tax Deducted at Source) on interest income (up to a limit).
  • Drawbacks:
  • Generally lower interest rates than FDs.
  • Lower total amount accumulated compared to FD for the same tenure (due to gradual deposits).

Summarising:

  • Go for FD if you have a lump sum and prioritize returns, even if it means less flexibility.

  • Choose RD if you prefer building savings habits through regular deposits and do not need immediate access to the money.

FD interest rates India have fallen consistently over the last 12 years.
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In Conclusion

The decision between FD (Fixed Deposit) and RD (Recurring Deposit) depends on your needs. FD offers a lump sum deposit with fixed interest rates for a specific period, which is suitable for those with a lump sum amount. RD involves regular monthly deposits with interest, which is ideal for those who can save small amounts constantly. Consider your financial goals and ability to save regularly when deciding between FD and RD.

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FAQs

  • Which is better, FD or RD or SIP?

    When considering the options of Fixed Deposit (FD), Recurring Deposit (RD), and Systematic Investment Plan (SIP), it's important to recognize their distinct purposes and risk profiles:

    • Fixed Deposit (FD): Ideal for individuals looking to invest a lump sum for a predetermined period. FDs offer assured returns with minimal risk but limited flexibility.

    • Recurring Deposit (RD): Suited for those aiming to cultivate a savings habit by making regular contributions. RDs yield returns comparable to FDs, with low risk and somewhat less flexibility.

    • Systematic Investment Plan (SIP): Recommended for individuals interested in long-term wealth accumulation. SIPs involve investing in mutual funds, potentially yielding higher returns in relation to market-related risks. SIPs also afford greater flexibility compared to FDs and RDs.

  • Which is better, FD or RD, in ICICI Bank?

    For ICICI Bank specifically, both FDs and RDs offer similar interest rates. So, the choice depends on your needs:

    • Choose FD if you have a lump sum and a fixed investment horizon.

    • Choose RD if you want to save regularly through instalments.

  • Is it worth investing in RD?

    RDs are a good investment plan in the following cases: 

    • You seek a safe, low-risk investment with guaranteed returns.

    • You want to inculcate a regular savings habit.

    • You need to build a corpus for a short-term goal.

    However, RDs might not be ideal for:

    • High returns: Interest rates on RDs are generally lower than other investment options.

    • Long-term wealth creation: RD returns may not outpace inflation over long periods.

  • Why is FD better than RD?

    Fixed Deposits (FDs) and Recurring Deposits (RDs) both have their pros and cons. The better choice depends on your financial need. Following are the reasons why people choose FDs over RDs:

    • Higher interest rates: For some tenures, FDs might offer slightly higher interest rates than RDs.

    • Lump sum investment: FDs are suitable for investing a lump sum amount at once.

    • Early withdrawal: Some FDs offer better interest payouts than RDs for premature withdrawals.

    However, FDs typically lock your money for a fixed tenure, reducing liquidity compared to RDs.


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