Recurring Deposit is a special kind of Term Deposit offered by banks in India which help people with regular incomes to deposit a fixed amount every month into their Recurring Deposit account and earn interest at the rate applicable to Fixed Deposits. It is similar to making FD's of a certain amount in monthly installments, for example ₹ 1000 every month. This deposit matures on a specific date in the future along with all the deposits made every month. Thus, Recurring Deposit schemes allow customers with an opportunity to build up their savings through regular monthly deposits of fixed sum over a fixed period of time. Minimum Period of RD is 6 months and maximum is 10 years.
The Recurring Deposit can be funded by Standing instructions which are the instructions by the customer to the bank to withdraw a certain sum of money from his Savings/ Current account and credit to the Recurring Deposit account.
When the RD account is opened, the maturity value is indicated to the customer assuming that the monthly installments will be paid regularly on due dates. If any installment is delayed, the interest payable in the account will be reduced and will not be sufficient to reach the maturity value. Therefore, the difference in interest will be deducted from the maturity value as a penalty. The rate of penalty will be fixed upfront. Interest is compounded on quarterly basis in recurring deposits
Features of a Recurring Deposit:
Allows you to deposit money on a continuing basis rather than a one-time payment at opening.
Ideal for people with a regular, stable income who may not be able to spare enough cash to open an FD.
It is for a pre-determined fixed tenure which can range from a few months to several years.
Offers a higher rate of interest than a savings bank account, like an FD, but with a smaller ongoing investment.
Enables regular, ongoing savings.
Allows premature withdrawal in case of necessity.
Is a safe, low-risk form of saving. Popular form of saving in India.
Has relatively low returns when compared to other forms of investment, but is secure.
The advantage of an RD is that you can enjoy the same higher interest rate as a fixed deposit as compared to a regular savings account. If you get the same interest as a fixed deposit and in an RD, then what is the difference? Well, the difference between an RD and an FD is that a recurring deposit allows you to make ongoing periodic investments in the deposit, whereas in a fixed deposit, you need to deposit the entire lump amount at the time you open the FD account. So for example, if you do not have Rs. 20,000 in cash to invest in an FD, you can put away a small amount, says Rs. 1000 every month into the RD and enjoy a higher interest rate than your regular savings bank account.
An RD is a way to encourage saving among individuals who may not be able to spare a large sum to open an FD, but prefer to invest smaller amounts on an ongoing periodic basis.
You can also deposit the money in an RD with a standing order with your bank so that the deposit is automatic. The bank will deduct the amount you have specified (say, Rs. 1000 every month) and credit it to your RD account. This is a form of automatic saving and ensures that you set aside a fixed amount on a regular basis regardless of your other expenses. On maturity of the RD, you are credited with the entire amount, which includes the principal plus interest.