Recurring deposits (RD) is one of the most popular and secure saving instruments. All the banks, whether it is a big bank or small finance bank, provide a recurring account.
An RD is a disciplined way of saving where a fixed sum of money is saved every month. After you open an RD, the amount is transferred automatically from the savings account to the recurring account.
The recurring account gives the option to save money as per the need of the individual. While a recurring account may be a good starting point for people who have just started investing, it comes in all shapes and sizes. Hence, it becomes essential to check the features of recurring deposits before you open an account.
Here are the four factors that you need to check before you open an RD:
The interest rate given by RDs varies across banks and different tenures. Typically, the longer the tenure, the higher is the interest rate. But, it may not be correct all the time. The medium-term deposits attract the highest interest rates. For long-term deposits, the interest rates are generally lower as the individual gains a higher amount of interest in the time horizon.
We all want to get the highest returns on our investments. After all, we have worked hard to earn money. A higher interest rate means that our money will grow faster.
Let us assume that you are saving Rs.5,000 per month in a 24-month RD. The rate of interest is 7.5%. When we use an RD calculator, we will see that by the end of 24 months(2 years), you will have Rs.1.30 lakh in your bank account. If we decrease the interest rate by 1%, i.e. to 6.5%, the total corpus grows to Rs.1.28 lakh. Hence, your total sum will lag by Rs.2,000. While it may not sound much but in the long run and with higher principal amount, the difference is likely to be huge.
While you may be tempted to go for the tenure that pays the highest interest rate, it is always better to look at your time horizon.
Recurring deposits have different tenures. These are short term tenure, medium-term tenure and long-term tenure. A short term tenure is usually between 6 months to 12 months, the duration of a medium-term tenure RD is between 1 year to 5 years. Long term tenures RD come with a span of five years to 10 years. In the current scenario, the long term tenures are extremely rare.
The term period is one of the factors as a bank customer; you would want to have all the different RD tenures that are available. It gives you higher options to select the mandate that aligns with your financial goals. You may have an intention of going to Goa in the next six months or buying a Royal Enfield bike in the next three years. With the different tenures, you can quickly look at the RD tenure that is close to your goals.
The minimum investment amount of the RD varies from bank to bank. For a few banks, the minimum amount to open an RD may be Rs.500 while for others it may be Rs.5,000. Hence, it is essential to know the minimum investment amount. This factor is significant for people who have just started working as they may not have a lot of surplus income. As in RD, the RD amount is automatically deducted from the savings account, and you have to make sure that you have the required amount in your savings account.
Nowadays, nearly all banks provide with the facility of premature withdrawals. While it is better to stay invested for the entire duration, an emergency may surface any time. This may require you to break your recurring deposit prematurely. In this case, you have the option to break the RD. However, a premature withdrawal penalty may be charged by the bank. Therefore, when you are looking to open an RD, look for a recurring deposit that has the lowest withdrawal penalty.
The RD interest rate, the term period, the minimum amount required to make an RD and premature withdrawal charges are the four factors that you need to keep in mind before opening an RD. A recurring deposit with a high-interest rate, availability of the different term tenures, low minimum amount and a low penalty charge may signal the best RD. Also, it is always better to look at RDs that align with your financial goals. The RD may give the highest returns, but if it does not help you to fulfil your financial goals, it is of no use.
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