Are you often left confused with the number of options you can have to invest your savings in? As a young professional or student, it can take a while to get a grip on the financial world. You are in front of a pool… not knowing where to dive.

• You’re skeptical in the initial phase about the risk you would take. 
• You are not even that well-read about the market to make informed decisions and take the right risk.
• You still want to invest somewhere because you want to get into the habit of saving.

This is where Fixed Deposits and Recurring Deposits in banks can help you.

Banks offer these investment schemes to help you develop a saving habit while ensuring consistent returns.

Depositing your money with a bank is safe, and risk-free. How?

Let’s say you’ve deposited Rs. 100 with the bank for a year, and another 100 in the shares of a company.

At the end of one year – with a bank FD, you can rest assured to get back at least the invested amount along with returns (even if the markets drop low, you’ll get a small percent on it). 

But with the money in shares or other financial instruments, it could be lower than 100, the same, or exponentially higher… which can only be predicted, not guaranteed. 

Yes, markets do fetch you higher returns, but that means taking higher risks too. 

But if you just want to understand how things work, and not play with the risk a lot, Bank deposits are your answer.

Now, these deposits are different from opening a savings or current account. 

You open an account for operations; you make a deposit for savings. Hence, deposits also have a fixed lock-in period. Meaning, you must keep your money for at least the said period. If you wish to withdraw the amount before maturity, a penalty is charged – usually up to 25% of the amount you invested.

Coming to the main question - How is an FD different from an RD?

Also read: Credit Cards- Need or a Trap?

FIXED DEPOSIT

• Meaning: A fixed deposit is where you deposit a lump sum in one go and earn interest on the said amount in regular intervals.

• Tenure: A fixed deposit can be opened for as low as 7 days, and as long as 10 years.

• Rate of interest: The rate differs from bank to bank, but usually ranges between 7-8% throughout and it is calculated on the entire sum invested. The interest is paid out either monthly or quarterly, as opted by the investor.

• Taxation: To incentivize people on more savings, the Income Tax department gives you a deduction on the amount invested in a fixed deposit. However, the interest you earn on it is charged with tax.

• The banks deduct TDS and transfer the amount to your account. That said, if your income falls below the minimum taxable income, you can claim a refund as per the Income Tax rules.

• Limit: There is no fixed limit for an FD. The minimum and maximum limits are usually decided by the bank. You can also renew the entire FD on the date of maturity.

• Benefits: Besides a consistent income source, FD can also help you with security. If you wish to take a loan from a bank or any other financial institution, you can use your FD as a security against the loan.

Also read: Savings vs. Current Account

RECURRING DEPOSIT

• Meaning: As the name suggests, this is a deposit where you invest recurrent amounts in fixed intervals. Similar to an SIP.

• Tenure: The tenure of an RD differs from bank to bank. The minimum period can range from 6 months to a year, and the maximum period is usually 10 years.

• Rate of interest: The interest earned on an RD is calculated on the amount deposited – which changes monthly/quarterly based on how you choose to invest. It fetches a relatively low amount of interest in the end.

• This is because the initial amount invested is usually low and it grows over time.

• Taxation: The rules for taxation on FDs and RDs remain the same. 

• Limit: There is no prescribed limit for an RD. Here, too, the limits are decided by individual banks.

• Benefits: With an RD, you don’t have to set aside a big chunk of your income in one go. This is meant to accumulate your savings in chunks over a certain period.

Also read: Evolution of banking

The last word:

You cannot place the weights on either of them at once. To know which one is better for you, you need to consider your capacity and requirements. If higher interest income is what you’re looking for, go for an FD. If you want to start with smaller investments, choose an RD. Whichever you choose, rest assured to not invest too big an amount. 

Experiment with your options and learn over time which investments work the best in your favour.