Fixed deposit is a risk-free and secure investment offered by banks, post offices and other financial institutions where you can deposit a lump sum for a fixed time period. Once the money is invested, it earns a pre-defined rate of interest until maturity. The fixed deposit has flexible tenure.
The investor has the flexibility to choose the tenure of the FD. Fixed Deposits can be used to park money for the short-term and can also be used to fulfil long-term investment goals. One of the main criteria of fixed deposits is that it cannot be withdrawn before maturity. A premature withdrawal of FD entails a penalty which is 1-2% on the interest.
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A recurring deposit is also a risk-free and secure investment offered by banks and the post office where you don’t need to deposit a lump sum. You simply deposit a fixed amount each month for a pre-defined time period. Recurring deposits also come with flexible tenure that ranges from 6 months to 10 years. The interest on recurring deposit is compounded quarterly.
If you compare both the investment options, you will realize that a fixed deposit offers better income. This is because in fixed deposits, a lump sum amount is deposited which earns interest across the tenure of the deposit. In this way the principal amount grows and enjoys the compounding benefit or return on return.
In a recurring deposit, the first instalment earns interest for a period of 12 months. The second instalment earns interest for 11 months; the third receives interest for 10 months and so on. The money accumulates across the tenure.
As a result, the recurring deposit earns lower interest income than a fixed deposit. You can use the online FD calculator and online RD calculator, to easily calculate the maturity amount on both investments.
Both the fixed deposit and recurring deposit are good investment options for the risk-averse. Individuals who want to invest a lump sum lying idle in their savings bank account can opt for fixed deposits as it offers higher returns along with capital protection.
A recurring deposit is an ideal investment for investors who want to save a portion of their monthly income and accumulate a corpus over a time period. In this way an investor can gain wealth by regularly depositing money and earning interest on it. Now, the choice depends on the investor’s financial goals and investment capacity.
See Also: Fixed Deposits Vs Mutual Funds
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