Everything You Must Know About Recurring Deposits

Recurring Deposits (RD) provides customers with the flexibility to invest an amount of their choice each month and save money with ease. Recurring deposit accounts are offered by most of the banks and NBFCs in India with tenures ranging from 6 months to 10 years. The interest rate usually ranges from 5.00% - 7.85%.

Features of Recurring Deposit

RD offers you a fixed interest on the invested amount at a specific frequency till the predetermined term or up on maturity. At the end of the term, the amount upon maturity(which is your invested capital) along with remaining or accumulated interest is paid.

The main features of Recurring Deposit account are as follows:

• Recurring Deposit schemes aim to inculcate a regular habit of saving among the public.
• Minimum amount that can be deposited varies from bank to bank. It can be an amount as small as Rs.10.
• The minimum period of deposit starts at six months and the maximum period of deposit is ten years.
• The rate of interest is equal to that offered for a Fixed Deposit and is hence higher than any other Savings scheme.
• Premature and mid term withdrawals are not allowed. However, the bank may allow it to close the account before the maturity period, sometimes with a penalty for premature withdrawal.
• RD offers the additional benefit of taking a loan against the deposit, i.e., by using the deposit as a collateral. About 80 to 90% of the deposit value can be given as loan to the account holder.
• The Recurring Deposit can be funded periodically through Standing Instructions which are the instructions given by the customer to the bank to credit the Recurring Deposit account every month from his/her Savings or Current account.

3 Important Factors to Check Before Applying for RD

Recurring deposit is an investment product that is made available by banks. The principal amount invested earns interest at regular intervals and the lump sum is handed over to the depositor at the time of maturity. Although recurring deposit is a safe investment option and the return on investment is mostly guaranteed, there are some factors any person should consider before investing money in a recurring deposit account.

1. Interest Rate Offered by the Recurring Deposit Account

The interest rate offered by banks on different term periods varies from bank to bank. The interest rate offered by different banks to a recurring deposit account holder generally ranges from 3.5% to 8.5% p.a. The rates of return vary depending on the tenure of the deposit selected. For medium-term deposits, the rates are generally the highest. For long-term deposits, the rates are usually slightly lower as the deposit holder stands to gain a higher amount of interest overall.

2. Term Period of the Recurring Deposit Account

The term periods are divided into three categories:

• Short-Term Tenure: A short-term tenure usually lasts from 6 months to a year.
• Medium-Term Tenure: A medium-term tenure usually lasts from more than a year to 5 years.
• Long-Term Tenure: A long-term tenure lasts from more than 5 years to 10 years.

A method of earning on the capital invested in a
recurring deposit account is to invest in the term period that provides a high rate of interest with the term period being as short as possible.

3. Facility of Premature Withdrawal in the Recurring Deposit Account

All banks that offer the facility of opening a recurring deposit account also provide the option of premature withdrawal with it. The interest payable will be calculated based on how much of the tenure is completed. A premature withdrawal penalty will also be charged by the bank. Therefore, while investing in a recurring deposit account, choose such a bank that offers a high rate of interest and charges a low fee on premature withdrawal.

Must Read: Mistakes People Make While Buying Term Plan

Recurring Deposit: Eligibility Criteria Of Any Individual.

• Any minor who is above 10 years of age is eligible to open a recurring deposit account if he or she provides proof of the name.
• Any minor who is below or equal to 10 years of age under the guardianship of a natural or legal guardian.
• Any corporate, company, proprietorship or commercial organisation.
• Any government organisation.

Recurring Deposit: Documents Required

• Application form which can be obtained from the bank you select to open the recurring deposit account in.
• Passport size photographs of the applicant.
• Identity proof and address proof of the applicant willing to open the recurring deposit account.
• KYC documents if the bank requests for it.

How to Close an RD Account?

A Recurring Deposit (RD) can be closed easily through any one of the following ways depending on your bank:

• Offline: Visit your bank branch and submit a request for closure of your recurring deposit account
• Net banking: Log into your bank's net banking facility and follow the steps required to close your RD account
• Mobile banking: Log into your bank's mobile application and follow the steps required to close your RD account.

In all the instances given above, the amount at closure will be deposited into the same savings bank account from where the recurring deposit amount was being collected.

Recurring Deposit Formula

The formula to calculate the interest that can be availed by the depositor at the end of the maturity period for a recurring deposit account is as follows:

I={{P*n(n+1)r}/{12*2*100}}}

where,

‘I’ is the interest rate that is to be calculated via the formula.

‘n’ is the number of months.

‘r’ is the rate of interest per annum.

‘P’ is the principal amount.

The formula to calculate the maturity amount is

M = P(n)+I

where,

M is the maturity amount received by the depositor from the recurring deposit account at the end of the maturity period.

P(n) is the principal amount deposited.

It is the interest received by the depositor on the recurring deposit account.

Benefits of Investing in Recurring Deposit

Investing money in a recurring deposit account is a shrewd investment as the principal amount invested is almost guaranteed to give a return. The rate of return offered on it is also attractive. All this makes the recurring deposit a smart investment option.

Some of the other benefits of investing money in a recurring deposit account are:

1. A Simple Financial Product To Invest In

A recurring deposit is one of the simplest financial products in the world to invest in. The concept of investing money in it is pretty simple. For any person who is new to the world of financial investment, experts always advise the person to invest their money in a recurring deposit account. Initial investments in recurring deposits also develop good investing habits for the individual.

2. Guaranteed Returns

Unlike equity and mutual funds, recurring deposits offer guaranteed returns on the principal amount invested in the short term.
Tenure and minimum amount to be deposited: The tenure of a recurring deposit account usually varies from 6 months to 10 years. The depositor can select the short-term, medium-term or long-term period for investment in a recurring deposit account.

3. Anytime Withdrawal

Recurring deposit accounts also offer the facility of withdrawal of the account anytime. The bank might charge a small fee for it but it is still a good option for the depositor to have in case he or she needs the deposited money along with the return on it urgently.

4. Loan Against Deposit

Banks also provide the facility of loan against recurring deposits. A depositor can avail a loan amount equivalent to 90-95% of the total money deposited in the recurring deposit account depending on the bank.

5. Flexible Recurring Deposits

Another advantage of investing money in a recurring deposit account is flexibility. A flexible recurring deposit is a scheme in which a person can invest any amount of money (greater than the minimum amount) at any intervals of time. Some banks also allow the facility for the depositor to skip an installment without paying any penalties

Conclusion

Recurring deposit is one of the simplest and easiest financial products to invest in. Usually the experts advise the depositor to invest in short-term tenure that has an attractive interest rate to offer.

Also Read: Term Insurance or Endowment Plan: Which Has the Better Benefits?

Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised not to rely on the contents of the article as conclusive in nature and should research further or consult an expert in this regard.