Recurring Deposit: A Big YES Or A Giant NO?

By BankBazaar | August 16, 2016

Recurring Deposits A Big YES Or A Giant NO Rakesh

If you’re new to the world of savings, people might suggest that you make a good start by opening a Recurring Deposit. That’s actually a decent way to take your first step towards financial security. If you’ve already opened one, that’s awesome. In case you haven’t, and are still contemplating it, this article should make things easy for you.

Since it’s about your money, we know you’d want to handle it with extra caution. To do that, it’s important to understand the functioning, advantages and disadvantages of any saving scheme before actually putting your money in it.

Additional Reading: Top 10 Recurring Deposits For 2016

So, let’s start with the basics. We promise that by the time you finish reading this article, you’ll have a better idea about Recurring Deposits and whether they’re a good investment option for you or not.

Here we go.

What is a Recurring Deposit?

‘Start small to achieve big.’ This is the basic philosophy behind the functioning of Recurring Deposits. All you need to do is keep an amount aside monthly. It’s basically a type of Term Deposit where you can deposit a fixed amount, every month. It’s offered by most of the banks and financial institutions and is also available at the Post Office.

Why is it better than a Savings Account?

You might think that since you already have a Savings Account, opening a Recurring Deposit doesn’t make sense, since both serve the same purpose. You’re wrong! They are two different things, meant for different purposes. There are a couple of advantages to saving your money in a Recurring Deposit rather than putting it all in a Savings Account. Here they are:

  • Better rates of interest: You can earn a better rate of interest by keeping your money in a Recurring Deposit as compared to a Savings Account. Instead of opening multiple Savings Accounts, it’s better to open a Recurring Deposit and make more money, isn’t it? Also, the interest rates on Recurring Deposits are fixed and hence safe from market fluctuations. What more do you need to keep your money safe?
  • Drop by drop, you break the rock: Since you need to put a fixed amount in your Recurring Deposit every month, you automatically start to save. Depending on the bank you can open a Recurring Deposit with as little as Rs. 100. So, you have no excuse to not put a little money away. If saving for a rainy day is something you struggle with, it’s time to open a Recurring Deposit, friend!

So, now you know why Recurring Deposits are a better idea than putting all your money in a Savings Accounts, don’t you? Good! Let’s analyse other advantages and disadvantages of opening a Recurring Deposit then.

Advantages of a Recurring Deposit

As we mentioned before, opening a Recurring Deposit could turn out to be one of the best decisions of your life. Here’s how:

  • My dream car, here I come!

Opening a Recurring Deposit is one of the best ways of saving up for your short-term goals, like buying your dream car, that latest TV and what not! You just need to buckle up and challenge yourself to save. Once you open a Recurring Deposit, you’re bound to deposit a certain amount (decided by you) at regular intervals. You could decide this amount according to the size of your goal. For instance, if you’re planning to save for your dream car, you’ll have to calculate how much you will need for the down payment and then start putting money into an RD to save up for it. The rest, of course, can be financed by a Car Loan. If you dream big and are looking at a big, expensive set of wheels, you’ll also have to save big!

  • Market fluctuations? What’s that?

Since all Recurring Deposits have a fixed rate of interest (subject to the terms and conditions of the bank), your money is less affected by market fluctuations. In the case of a short-term RD, you can have a fixed interest rate. However, in the case of a long-term RD, there may be some conditions attached.

  • Savings become a cakewalk

Most of us find it too difficult to save. No matter how much we earn or how hard we try, we always end up being broke at the end of the month. If you face the same problem every month, you must consider opening a Recurring Deposit. Why? Because you need to deposit a fixed amount in it every month and there are no two ways about it. Opening a Recurring Deposit is not enough. You also need to be careful about maintaining a decent balance in your Savings Account as the monthly contribution is usually auto-debited from your account. You might find it a bit difficult to manage in the beginning, but eventually, you’ll become a pro at savings. Value-added bonus! We know!

  • Do you want a loan? What’s stopping you?

Yes! You can apply for a loan against your Recurring Deposit. This is another way to fund that dream car, or house. You can use that deposit as a collateral and apply for a loan. In most cases, you can get up to 80-90% of the deposit value as a loan. The best part? You usually get a pretty good deal on the loan interest rate as well. Pretty cool, isn’t it?

All good things are bound to have some disadvantages as well. Recurring Deposits are no different. Here are some of the major disadvantages:

  • Your money, your wish? Not anymore!

Once you open a Recurring Deposit, you no longer get to command it the way you can with a Savings Account. You can’t just withdraw from it whenever you wish. Recurring Deposits are less liquid than a Savings Account and you need to break the Recurring Deposit to get back your money.

  • Want to break your Recurring Deposit? Pay premature penalties!

Banks don’t allow you to withdraw money from your Recurring Deposit. But if you choose to close the account before maturity, you might have to pay a penalty for it. You wouldn’t want to do that, would you? While opening a Recurring Deposit, you need to be mentally prepared that it’s not going to be an easy journey. It’s going to very difficult trying to curb the temptation to close that account and get your money. But if you really want to see your money grow, just let it be. If you think you’re patient enough, go ahead and open that Recurring Deposit.

  • Welcome to the world of TDS

If you think that TDS won’t get deducted from your Recurring Deposit, you are wrong! According to last year’s budget, TDS deductions have been made compulsory for your Recurring Deposit if your income from deposits for a financial year exceeds Rs. 10,000. Earlier, TDS deductions were made only for Fixed Deposits. This new change actually made a lot of people reconsider their Recurring Deposits. Some even opted for premature closures. This might make you give that Recurring Deposit a second thought as well.

Now, we’re back to the main question—is a Recurring Deposit a big ‘yes’ or a giant ‘no’? Well, it depends on you. Like we mentioned earlier, if you’re looking for a way to start saving for your short-term goals and don’t mind depositing a good chunk towards your Recurring Deposit, it’s a big ‘yes’!

On the other hand, if you’re looking for something for the long term with higher returns and are okay with taking on a little more risk, then Recurring Deposits are probably not for you. But since it’s one of the best saving tools, we suggest you give it a thought. Modifying your habits a bit won’t hurt, especially when you’re  getting such huge benefits, right?

All information including news articles and blogs published on this website are strictly for general information purpose only. BankBazaar does not provide any warranty about the authenticity and accuracy of such information. BankBazaar will not be held responsible for any loss and/or damage that arises or is incurred by use of such information. Rates and offers as may be applicable at the time of applying for a product may vary from that mentioned above. Please visit www.bankbazaar.com for the latest rates/offers.
Category: Money Management

About BankBazaar

BankBazaar is the world's first neutral online marketplace for instant customised rate quotes on Loans, Credit Cards, Insurance and Investment products. Shop for financial products just like you buy everything else now - online.

Leave a Reply

Your email address will not be published.