Out of all investment options available in India, FDs and RDs are two common options. One reason for this is their reasonable return potential. RD promotes disciplined saving via regular contributions but yields lower returns when compared with FDs. Both of these financial instruments provide a secure avenue for growing your capital, but they both serve different financial needs and goals. Knowing the difference between FD vs RD helps make the right investment decision based on the type of financial situation.
What is a Fixed Deposit (FD)?
A Fixed Deposit is an investment instrument offered by banks and non-banking financial companies (NBFCs). It allows you to deposit a certain amount of funds for a fixed period that can range from 7 days to 10 years. The interest rate is decided beforehand, and you will get the principal amount, including the interest, at maturity. It can be suitable for those who have a large amount of money available at hand to invest upfront.
Main Features of FDs
Here are some of the main features of Fixed Deposits:
- Lump Sum Investment: You invest a single time in the FD account.
- Locked-in Tenure: The capital is placed in the FD for this tenure.
- Assured Returns: Interest earned from the FD is fixed interest, which is more substantial than that of a savings account.
- Interest Payment Options: You can receive interest either through any regular interval, monthly, quarterly, annually, or at maturity.
What is a Recurring Deposit (RD)?
A Recurring Deposit (RD) is a savings option offered by banks that allows individuals to deposit a fixed amount every month and earn interest similar to fixed deposits. The interest earned is based on the recurring interest rate set by the bank, which can vary across institutions. Depending on the bank’s offerings, the RD tenure may range from six months to ten years. At maturity, the investor receives the total savings along with the accumulated interest. RDs promote disciplined saving habits with steady, predictable returns, making them suitable for those aiming to grow their savings through regular investments.
Main Features of RDs
Below are some of the important features of recurring deposits:
- Regular Investments: You make regular investments in the form of a fixed amount every month.
- Fixed Tenure: Like FDs, RDs also have fixed tenures.
- Competitive Interest Rates: RDs usually offer interest rates almost at par with FDs.
- Disciplined Saving Habit: RDs help develop a habit of saving regularly.
Key Differences between FD and RD
The first key difference between FD and RD is the way you deposit your money. Apart from this, here are some more differences that will help you better understand them:
| Aspect | Fixed Deposit | Recurring Deposit |
| Investment Method | In an FD, you make a one-time lump sum investment for a fixed period. | In an RD, you deposit monthly contributions over the selected tenure. |
| Interest Rates | FDs generally offer slightly higher returns since the entire principal amount is invested from the beginning. | RDs offer competitive rates but may offer lower returns compared to FDs over the same tenure since the monthly contribution is smaller. |
| Liquidity | FDs are not liquid since your capital is locked in until maturity. Early withdrawal will be penalised. | RDs are more flexible because you contribute smaller amounts regularly, which makes it easier to access some funds if needed. |
| Renewals | FDs are auto-renewable. | Auto-renewal is generally an option available with RDs. However, some selected firms may offer it |
| Suitable For | FDs can be suitable for people who have a lump sum available for investment and who want fixed returns without worrying about market fluctuations. | RDs may be suitable for people who want to save gradually through monthly contributions and may not have large sums available upfront. |
Which Option Should You Choose?
The choice between an FD and an RD depends largely on your financial goals and current situation. If you have a lump sum amount that you won’t need for a set period, a Fixed Deposit (FD) might suit you better. It offers potentially higher returns and fixed principal investment. You can also use a fixed deposit interest calculator to estimate your potential earnings and choose a suitable tenure and rate.
On the other hand, if you prefer saving smaller amounts regularly and want to build a habit of disciplined investing, a Recurring Deposit (RD) can be a better option. It tends to help you grow your savings gradually while earning decent interest.
Conclusion
Both Fixed Deposits (FDs) and Recurring Deposits (RDs) serve as reliable and secure savings instruments, each catering to different financial habits and needs. FDs can be suitable for those with a lump sum amount looking for higher, assured returns over a fixed period, whereas RDs may suit individuals who prefer to save regularly through monthly contributions. Understanding your financial goals can help you choose the right option. By comparing features such as interest rates, investment methods, and liquidity, you can make an informed decision that aligns with your saving strategy. Whether you opt for an FD or an RD, both may contribute toward building a strong financial foundation.