#recurringdeposits

Fixed Deposits, as well as Recurring Deposits, are investment vehicles that offer fixed returns along with a capital guarantee. Fixed Deposits and Recurring Deposits do not require any regular maintenance as they are not subject to market volatility and extremely simple in nature.

Difference between a Fixed Deposit and a Recurring Deposit

1) Type of Investment

     •A Fixed Deposit Scheme is a single one-time lump sum investment.

     • A Recurring Deposit is an investment where you choose a term and invest in it at regular intervals. In a Recurring Deposit Scheme, you enter into a Fixed Deposit Scheme at the frequency of monthly, quarterly, half-yearly investments depending on what you find comfortable.

2) Tenure-

     • The tenure of a Fixed Deposit Scheme is – minimum 7 days to a maximum of 10 years.

     • The tenure of a Recurring Deposit is – minimum 6 months to a maximum of 10 years.

3) Minimum Investment Amount-

    • The minimum amount required to open a Fixed Deposit Scheme is INR 5000.

    • The minimum amount required to open a monthly Recurring Deposit account with some banks is as low as INR 100.

4) Rates: Fixed Deposit interest rates are usually slightly higher than Recurring Deposit interest rates. Also, Fixed Deposit returns are higher than Recurring Deposit returns for comparable tenures and investment amounts.     • Let us assume you have created a Fixed Deposit investment of INR 30,000 for a term of 5 years. You have assured a Fixed Deposit interest rate of 7.25%. After 5 years, your total investment value (Principal amount + compound interest) will be INR 42,968.     • If you opt for a Recurring Deposit account in which you invest INR 500 per year for a period of 5 years and are assured interest of 7.25%, your total investment amount will be INR 30,000 and your return will be INR 36,207 (total investment amount plus compound interest).

5) Tax Saving Benefits-

   • Fixed Deposits that have tenure of 5 years, qualify for tax deduction under section 80C.

   • Recurring Deposits don’t qualify for tax benefits under section 80C.

6) Liquidity:

   • Fixed Deposit Schemes require you to invest lump sum amounts for the tenure you select. You can withdraw prematurely but usually by paying a penalty.

   • Recurring Deposits don’t block up large chunks of your money but rather give you the option of regularly investing smaller amounts that you can comfortably do so either monthly, quarterly, half-yearly or annually. You can withdraw pre-maturely but that attracts a penalty in Recurring Deposit Schemes too.

Which is better- A Fixed Deposit or a Recurring Deposit?

    • If you can keep larger amounts of cash invested for a longer tenure and also require tax-saving benefits, a Fixed Deposit is a better investment for you.

   • If you wish to invest small chunks of money regularly over the tenure of your choice, Recurring Deposit accounts are a better investment option for you. If you desire to create an investing discipline in yourself, then Recurring Deposits are more suitable.

Bank fixed deposits, a staple investment product since the 80s and 90s, are considered secure wealth creation products. I remember my uncle telling my cousin, Neha about it after he had invested in bank FDs. He expected her to do the same as well, once she started earning.

But with the changing times due to the new monetary reforms, new investment avenues came into existence. Neha avoided following in her father’s footsteps as soon as she started working as a PRO for a top media house. She instead invested her hard-earned money in shares, gold bonds, and ULIPS to earn better returns with a high-risk trade-off.

Soon Neha realised, every investment avenue she chose had risk attached to it. As she had lost too much already, she decided to follow her father’s conservative investment approach. After all, there are five good reasons to invest in a bank FD:

Fixed and secured returns, unlike market-linked instruments;

Addresses liquidity needs (if the plan and tenure is thoughtfully selected);

Addresses short-term goals and contingency requirements;

Can take a loan against bank FD when in dire need of money; and

A 5-year tax-saver bank fixed deposit can help in tax planning as well

[Read: Factors To Look At While Investing In Bank FDs]

Recently, Neha went to her bank and was about to invest her savings into an FD.

However, a familiar friendly bank executive explained to her that investments have to be goal-based (short-term, medium-term, and long-term such as retirement), recognising one's financial health, risk appetite  (high, moderate, and conservative), investment objectives and investment time horizon before goals befall, and the tax implications.

Further the executive, thankfully and rightly, stated that the interest on FDs are taxable, and as an investment avenue may prove inefficient if you are in the highest tax bracket.

She explained to Neha how mutual funds work and the types available– equity-oriented mutual funds, debt-oriented, hybrid, solution-oriented, and other schemes (index funds and fund of fund schemes). Every type of fund has a set-out investment objective, which could address to a certain need. The broad objective could be capital appreciation and/or income generation, depending on the type and the investment mandate of the scheme. Thus, selecting a suitable type of mutual fund is crucial in the endeavour to generate wealth depending on the investor’s risk tolerance.

Since Neha was not willing to take very high risk, like in equities, the executive informed her about debt mutual funds.

If you are a conservative investor, you would, of course, prefer FDs and similar fixed income instruments (KVP, POTD, PPF, NSC, POMIS) for investments. But, if you are willing to take the medium-to-high risk, debt funds could earn slightly better and tax-efficient returns, the executive explained.

[Read:  5 Facets To Look Into While Investing In Debt Mutual Funds]

Further, the executive explained that debt mutual funds invest in a variety of fixed income securities such as Treasury Bills, Government Securities, Corporate Bonds, Money Market instruments, and other debt securities and with different maturity papers. There are 16 types of debt funds with a strict investment mandate.

So, for instance, if you have an investment time horizon of up to two years, consider short-term debt funds. If you have an investment horizon of less than one-year, low duration and money market funds would be the preferred choice. And if you have an extremely short-term time horizon (of less than six months), you would benefit from investing in liquid funds and ultra-short duration funds.

You ought to select debt mutual funds recognising your investment time horizon and risk profile.

Here are three reasons why investing in debt mutual funds could be better than fixed deposits:(www.Pixabay.com)Anurag invested in FDAshok invested in Debt MF.

1.Risk-Return

The returns on debt funds are market-linked and how efficiently the fund is managed. Investing in debt funds exposes you to various risks: interest rate risk and credit risk being the primary ones. Hence the disclaimer, “Mutual fund investments are subject to market risks, read all scheme related documents carefully.”

Currently, looking at the market volatility, two of the executive’s risk-averse clients, Anurag (a professor) and Ashok (a banker), invested Rs 2,00,000 for a short-term goal of three years. And by choosing debt mutual fund, the calculation shows how Ashok will earn better returns than Anurag.(www.freepik.com)

2.Taxation

The capital gains from a debt mutual fund are taxed depending on the number of months the units held. If you redeem the units within less than 36 months (or 3 years), the gains, referred to as Short-Term Capital Gains (STCG), will be added under your gross total income and taxed as per your tax slab.

But if you redeem the units at a profit after 36 months (or after 3 years)—referred to as Long-Term Capital Gain— you enjoy an indexation benefit and the gains are taxed at20% flat. This proves to be beneficial if you are in the highest tax bracket of 30 % as the indexation benefit reduces the tax burden.

Whereas the interest earned on FD is taxed as per the income tax slab, which proves disadvantageous for those in the highest tax bracket.

3.Liquidity

Depending on the type of fund you select, a debt mutual fund can offer far more liquidity compared to a bank FD. To park money for the very short-term, say from day to a week; consider an overnight fund as a substitute for holding money in short-term FD or a savings bank account. Likewise, if you require money a few months from now or to address contingency needs, a liquid fund is better suited.

Do note that premature withdrawals from FDs are subject to penalty and you lose out on a portion of your expected return. Debt funds have high liquidity.

A quick comparison between Debt Mutual funds and Bank Fixed depositsParameterBank Fixed DepositsDebt Mutual Funds

Before parting, Neha thanked the bank executive for making her aware about debt mutual funds.

But before investing, she wanted to double-check and thus reached out to me and enquired about credible mutual fund advice. I helped her on-board for PersonalFN’s unbiased and independent mutual fund research service.  

Today, Neha uses ‘PersonalFN Direct’-- PersonalFN’s robo-advisory platform that helps her to keep better track of her investments.

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Author: Aditi Murkute