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Difference Between Recurring And Fixed Deposit

Mr. C.S. Sudheer | Posted On Wednesday, October 19,2016, 07:20 PM

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Difference Between Recurring And Fixed Deposit



Have you heard this great saying, “Get rich slow, or get poor fast.”

Yes….if you want to grow rich the slow and steady way, consider an investment in fixed deposits and recurring deposits, at banks in India. The money you invest is safe… also get interest on the money, invested in a fixed deposit and recurring deposit. So what’s the difference between recurring and fixed deposit? You are a conservative investor, with a lump sum of money, to invest. You have a choice: Fixed Deposit or Recurring Deposit…..If you have a lump sum to invest, for a specific time interval (say 2 or 3 years), opt for a fixed deposit. You earn interest on your investment in an FD.

When should you invest in a recurring deposit? You want to invest in a fixed deposit, but don’t have a lump sum amount, to invest in one-shot. Try the recurring deposit. Recurring deposit is similar to an SIP, of a mutual fund. You deposit a fixed sum of money every month, into your recurring deposit account, at a bank in India. You earn interest at similar rates, as a fixed deposit. Your recurring deposit matures, at a specific date in the future. If you have a regular income, this is an excellent investment.

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Difference Between Recurring And Fixed Deposit

 Lump sum vs Regular investment

 An investment in a fixed deposit, is a single one time investment. You have a lump sum (a lot of money) you have saved, lying at home. You don’t know what to do with this money.  Invest this money in a fixed deposit and earn interest on your investment. You don’t have a lump sum to invest.

You are a salaried employee and want to save money regularly. Invest your money in a recurring deposit. You invest small sums of money regularly (say once each month), in a recurring deposit.

Remember: A recurring deposit is just like a mini fixed deposit. You enjoy the benefits of a fixed deposit, even though you don’t have a lump sum to invest in an FD.

Fixed deposit gives higher return than Recurring deposit

Let’s understand how a fixed deposit gives higher return than a recurring deposit, through an example.

       You invest INR 24,000 in a fixed deposit.

       The maturity of your fixed deposit is 1 year.

       You earn an interest of 9%, compounded quarterly.

       You have the formula:

                          A = P (1+ R/N) ^ N*T 

                          A = amount at the end of the year
                          P = principal invested
                          R = rate of interest
                          N = quarterly compounding. (Compounded for 3 months out of 12 months or 4 times a year)
                          T = time period of the investment = 1 year.

A = 24,000 (1+ 0.09/4) ^ (4*1) = INR 26,234.

Total amount after a year = INR 26,234.

The total annual interest you earn from FD

        = INR 26,234 – INR 24,000 = INR 2,234.

SEE ALSO: Term Insurance: How to buy the right term insurance plan?

What about the recurring deposit?

Instead of investing INR 24,000 for a year in an FD, you invest INR 2000 each month, in a recurring deposit. You earn an interest of 9%, compounded quarterly.

You can calculate the maturity amount using any RD Calculator available online.

You fill in:

Installment = INR 2000

Duration = 12 Months

Interest = 9 %

Compounding = Quarterly

You get the maturity amount from your RD = INR 25,195.

You get the maturity amount from your FD = INR 26,234.

You get INR 1,039 (INR 26,234 - INR 25,195), more from your FD, than your RD.

Tax benefits Fixed Deposit vs Recurring Deposit

The 5 year tax saver fixed deposit, is unique from other fixed deposits. You enjoy a deduction of INR 1.5 Lakhs a year, under Section 80 C of the income tax act, if you deposit your money in a 5 year tax saver fixed deposit. You don’t get Section 80 C tax deductions, from recurring deposits.

You know the difference between a fixed deposit and a recurring deposit. Each investment is unique. Choose a financial investment, depending on your financial goals and needs.

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