Whenever one talks of long term savings instruments, Fixed deposits (FD) happen to appear amongst the first options coming to one's mind. Fixed deposits have been always considered as one of the safest instruments for the risk averse investor group. However, there is one shortcoming with FDs and that shapes up with the fact that once a fixed deposit has been made for a particular amount, the amount gets ‘fixed' in literal terms for the tenor set for its maturity and cannot be altered in between.
Although fixed deposits can be made in any amount, but to make the best use, it is advised to make a one time investment of larger amount. However, there are certain investment options which allow the investor to choose how much he/she has to invest- in a phased manner.Two such investments are Recurring Deposits by banks and Systematic Investment Plans by mutual fund companies.
Recurring deposits (RD) require an investor to put a fixed sum every month for a minimum of 6 months and thereafter in addition of 3 months upto a maximum tenure of 10 years. It differs from fixed deposits in the fact that the depositor need not shell out a large lump sum amount of money at one go for the investment and thus it proves softer to his pockets. Recurring deposits being bank deposits have very low risk and are thus advised to people whose risk appetite is less, for example people planning a retirement fund.
Returns on recurring deposits are fixed and vary with tenure of deposit. For instance a 6 months recurring deposit with HDFC Bank gives 7.25% return, while a 60 months RD gives 9.25%, which is the same for the fixed deposits.
Recurring deposits work simply on the concept of compounding of money. The sum is invested, the interest is compunded monthly. On investing in a recurring deposit today with monthly investment of Rs. 5000, for 6 months, at interest rate 7.25%, the returns would be Rs. 30638.00, a profit of Rs. 638.