The disciplinarian deposit - RDs

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A recurring deposit calculator and the right set of RD features can make an RD a key part of our portfolios

For the longest time, the bank fixed deposit was a trusty source of earning off one’s money. As our markets bloomed, equity products came to the fore and people began to trust them. Today, fixed deposits have company not just in riskier ventures but also in the category of staid investments. They are called recurring deposits (RDs). Banks as well as India Post, through its post offices, offer us recurring deposit schemes.

It is not a good idea to let money pile up in our savings accounts. We are not short of investment options, no matter what our proclivity for risk is. 

An RD account guarantees us returns as it is not linked to bonds or stocks, but an assured rate of interest declared at the start of our tenure. The interest rates are similar to those given on term deposits by banks.

Armed with an RD calculator and a helpful scheme, we can find succor in this popular instrument.

In RD, we get to deposit a specific amount every month for a period of time, of our choosing. We earn interest at the rate offered by the bank at the time of opening the account. 

RD’s mainstay is its rule of regular deposits. It lets us get into the habit of putting away money for earning more instead of instant spending, even targeting some financial goals on the way. We don't have to wait for a lump sum to invest. This way it can be akin to SIPs (Systematic Investment Plans) which instil investor discipline in money market instruments.

RDs are also not volatile, relevant to anyone looking to balance or avoid volatility altogether. Other non-volatile instruments include small savings schemes, Employee Provident Fund (EPF) for the salaried person, and of course, the traditional FD.


What makes an RD
We can choose an RD term between six months and 10 years, at most banks, though at some, the minimum tenure can be a year as well. 


The minimum amount we choose to periodically deposit depends on the bank’s offerings, but it can be as little as Rs 10 in some cases.

The first, and the oldest, RD deposit gets the most time to earn us returns as it gets the whole tenure, while later installments earn interest for the months left.

We earn interest on a regular basis as our deposits are staggered over the stipulated period of investment. 

The interest we earn on an RD is a fixed rate, prevalent at the time of our opening the account. 

However, unlike small savings schemes, where the interest rates are predetermined, the rate on RD products at banks change with changes in bank interest rates, FDs. Hence, the timing of our subscription also matters in getting a good deal.


RD earnings
Once the RD matures, ie. the tenure is over, we get back our principal (the total of all the months’ deposits so far) and the interest accumulated at regular intervals. 

The RBI has been reducing the repo rates since February, 2019, due to slow economic growth and lowered inflation. This has led to a decline in interest rates offered by banks on FDs and RDs, albeit not to the same degree. Ideally, we should choose a period when a repo rate hike leads to banks increasing the rates offered to us on RDs to open a new account. 

Choosing an RD
Even then, it will pay to shop around banks and find the best terms, including the rate we get, at any given time.

If we miss an installment, banks and India Post levy a penalty. Some banks have been known to waive off this fee, so we should include it in our checklist before opening an RD account.

Another aspect to help us home in on the ideal RD should be the penalty imposed on early or partial withdrawal. RDs are geared to let us encash our earnings only after the tenure is over. Anything before, and we have to pay a price. But the quantum of penalty differs, which should be kept in mind.

The interest rate at our chosen bank will also vary with our principal and tenure chosen. Medium term plans carry the highest rates while long term ones a little lower, but in absolute earnings, they earn the most, of course. 

Here is a look at the range of rates at banks:-

Source: Bankbazaar.com; The rates mentioned are of 20th June, 2019

Types of RD
Regular - We choose our period of investment and the deposit amount with the bank at the time of opening the account. There is no scope for change thereafter. In the event of a missed deposit, we have to pay a penalty. If we withdraw the money from the RD account, we attract a penalty. We should be aware of these charges as they vary from bank to bank.

Flexible - The RD account lets us change the amount we deposit each month. We choose the tenure, which gets fixed at the start. But the installments can be tweaked based on funds available with us, over and above the base amount we choose at the beginning. The catch? We have to settle for a rate of interest, lower than the standard one available at the time.

SBI RD
Let us take a look at recurring deposits at India’s largest bank, State Bank of India. Its salient features, which will differ from other banks, are as follows:-

  • The minimum monthly deposits is Rs 100, and in multiples of Rs 10. There is no upper limit for us to invest in an RD account
  • The tenures range from one to 10 years
  • An overdraft facility of upto 90 percent is allowed against the balance. However, this would need to be repaid along with interest while the account is active
  • It allows premature withdrawal but the rules for Term Deposit Receipt (TDR)/Special Term Deposit Receipt (STDR) will be applicable
  • The rate of interest will be in line with the bank’s TDR/STDR
  • Its Flexi Deposit scheme is the bank’s flexi RD product which allows us to vary our installment amount and the number of deposits, provided we meet the predefined annual principal amount
  • The Flexi Deposit has a minimum installment amount of Rs 500, a minimum deposit of Rs 5,000 and a maximum of Rs 50,000 in a financial year, with quarterly compounded interest; the tenure range is five to seven years

Financial goals with RD
RDs translate into low financial strain. Not only is there a steady interest rate earning us assured returns, but the principal is also paid in installments without us having to cough up a lump sum.

RDs are not suggested as the primary investment scheme. It is a good way to make our savings after investments, work harder. 

However, for the ideal liquidity with RDs, we need to get our tenure right. Medium term, small ticket goals can be achieved with medium term RDs (usually longer than 15 months), which carry category-high interest rate. 

We have to remember that given the fixed interest rate, RD is not an instrument geared to beat inflation.

Calculate RD (formula)
We may estimate the interest earned at the end of our RD tenure using a formula.

First, we need to determine the interest income we will receive at our stipulated rate of interest. The formula for it is:-

 

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

Key to the formula notations are:-

‘I’ is the interest income we will get on our RD

‘n’ is the number of months in the tenure

‘r’ is the rate of interest stipulated per year 

‘P’ is the principal amount (the total capital we invest)

Once we arrive at our returns at the end of our tenure, we need to use the following formula to get the maturity amount:-

M = P+I

Key to the formula notations are:-

‘M’ is the maturity amount we stand to receive

‘P’ is the principal amount (the total capital we invest)

‘I’ is the interest income we will get on our RD

RD vs FD
RDs and FDs are similar in their fixed rate of income promised, for a tenure. The rate of interest, offered at the time of opening an account, also don't change for either. 

However, FDs fetch higher returns compared to RDs. We need to deposit the entire amount intended for a deposit at once on opening an FD account. So, a larger principal spends time collecting the interest in an FD. With RDs, the installments after the first get less time to earn interest.

But in spite of this, RDs have found favour with investors because of their defining trait -- they do not require a lump sum from us. FDs only make sense if we have a sizeable sum to lock up straight away. With an RD account, we could start with as little as Rs 10 (though, that would not get us far). 

RDs absolve us of having to wait on ceremony for a lump sum to come along.

RD vs SIP
For average investors like us, regularity and discipline are where we trip up mostly. Many of us can be found guilty of letting our earnings gather dust (or a sedate interest).

SIPs have become popular in equity products because of the discipline it allows while letting the investor forget about regular trades to get anywhere. 

RDs mimic the same, putting away some of our income to work without us having to worry about allocating it every month. 

As anyone with a nose for investing will tell us, we must not bank on one or two instruments alone for our investment portfolio. Hence, RDs can coexist with SIPs.

With an RD, we would be looking at an assured income (no negative income irrespective of the tenure), unlike in equities. We would, of course, have to forgo the liquidity that comes with SIP in equities, as RDs have a lockin period, ie. the tenure. We get penalised for early withdrawals.

RD vs PPF
Public Provident Fund (PPF) or other small savings schemes, for that matter, have a long lock-in period while RDs can have shorter tenures. Both kinds of instruments are considered to be less risky compared to other investment options in the market.

Partial withdrawals are allowed in PPF, while for RDs, we have the choice of a shorter period. 

PPF has a tax-saving edge over RDs in that our deposits are exempt from taxation. The principal, interest (all maturity proceeds) are exempted from income tax under section 80C. 

We can invest more than Rs 1.5 lakh in an RD account unlike the cap on PPF deposit.

Eligibility
An individual above 10 years of age or an organisation (corporate, commercial or government) can open an RD account. Those below 10 years of age will need a guardian to open such an account on her behalf.

Requirements
With the requisite identity proof and address  proof for the bank’s KYC (Know Your Customer) process, we will easily be able to open an RD account.

RD online
We may simply choose to open an RD account online. If we have a savings account with the bank we choose to open an RD with, we can activate the RD account through its net-banking services, without having to step inside one of the bank’s branches. Of course, we would need to have enabled net-banking to begin with.

We would still have to decide our monthly installments and the tenure. Basing these on our financial goals and the bank’s facilities will ensure we end up with the right permutation and combination.

RD with India Post
India Post also allows RD, with tenures ranging from two to five years. We can start with just Rs 10 a month, or an amount that is multiples of Rs 5, without an upper limit. It lets us open an account with cash or cheque (not online unlike banks), and the account can be transferred from one post office to another. After maturity, the RD account can be continued for another five years with a renewal every year.

RD taxation
A financial year’s worth of RD investment will be considered as a part of our annual income. If we are in the taxable (income tax) brackets, then interest earned on our deposit of more than Rs 10,000, (for senior citizens this threshold will be Rs. 50,000) will attract a 10 percent TDS (Tax Deducted at Source). The rest of the income tax on the interest earned will have to be paid according to our tax bracket.



There are alternatives to the recurring deposit scheme which might even promise better returns. It cannot be stressed enough, then, that an RD account should not be a primary investment tool for us. It should be considered in conjunction with other options that will help us with our financial goals.

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