Advantages and Disadvantages of a Recurring Deposit

An RD is a term deposit where you invest a fixed amount regularly for a set period. Upon maturity, you receive the total invested amount and the earned interest. It could help you save for upcoming expenses or build a corpus. 

You can conveniently invest in this savings tool by making regular, systematic investments at intervals of your choice. Before exploring the advantages and disadvantages of RD accounts, it's important to understand how they work. Here are some of its key features.

Here are some of the top advantages of a recurring deposit:

• Guaranteed Returns

One of the recurring deposit benefits is that it offers assured returns. You can rely on the fixed interest rate throughout the investment period.

• Recommended for Short-term Goals

RDs may be suitable for achieving short-term financial goals. They help you accumulate funds and earn interest on this amount within a set period.

• Build Savings Through Regular Instalments

RDs encourage disciplined savings with regular monthly deposits. This could help you steadily grow your savings over time.

• Saving for Minors

RDs can be opened for minors, helping them build a financial foundation for their future. A guardian manages the account until the child reaches maturity.

• TDS Relief

The RD interest rate may be eligible for TDS relief if the annual interest earning is less than ₹40,000. This reduces your tax liability, highlighting another benefit of a recurring deposit.

• Systematic Savings

RDs offer a systematic savings approach that aligns with a monthly income cycle. Regular deposits could help salaried individuals manage their savings and achieve their financial goals.

Here are some of the disadvantages of recurring deposit accounts you need to be aware of:

• Penalty on Premature Withdrawal

Withdrawing funds before the term ends incurs a penalty. This can reduce the overall returns on your investment.

• Lack of Flexibility

Once you open an RD account, you cannot change the instalment amount or tenure. This inflexibility may not suit everyone’s financial situation.

• Moderate Interest Rates

The interest earned on an RD is moderate compared to other investment options, such as fixed deposits or mutual funds. This might limit the growth potential of your savings.

• Monthly Commitment

RDs require consistent monthly investments for the chosen tenure. Missing an instalment can result in penalties, impacting your returns.

• Withdrawal During Lock-in Period

RDs typically have a lock-in period, during which withdrawals are not allowed. Withdrawing early may result in forfeiting earned returns.  

Now that you know the key advantages and disadvantages of a recurring deposit account, let's look at the steps to open one:

1. Choose the Financial Institution

Decide whether to open a recurring deposit with a bank, NBFC, or Post Office. Compare RD interest rates and terms offered by each.

2. Visit the Nearest Branch

Go to the issuer’s nearest branch or visit their website to check the account opening procedure. 

3. Fill Out the Account Opening Form

At the branch, request the RD account opening form. Enter the deposit amount, tenure, and personal details.

4. Submit the Form and KYC Documents

Attach the necessary KYC documents and a cheque or DD for the first deposit. Submit the form to the branch official.

Alternatively, you can log into your bank or NBFC's internet banking portal to open an RD online if the option is available. Before investing, consider the key advantages and disadvantages of RD accounts. This could help ensure it aligns with your financial goals.

A recurring deposit account is accessible to a wide range of individuals. While the eligibility criteria may vary among issuers, here are some investors who are generally eligible to invest in RDs: 

• Indian residents, including minors with a guardian

• Senior citizens above 60 years

• Non-resident Indians (NRIs) through an NRO account

• Individuals and joint account holders

• Trusts, companies, and Hindu Undivided Families (HUFs), depending on the issuer’s policies

These are the key advantages and disadvantages of recurring deposit accounts. Understanding these points will help you make informed decisions. This helps you plan your deposits effectively and optimise returns. It also ensures guaranteed interest while steadily saving for the future.