How Does Recurring Deposit Work

• 18 March 2017 | 2521 Views | By Mint2Save

Recurring Deposit is a small savings based financial tool which can be used to meet a lot of your life’s goals without any risks, and with certain returns. It is one of the most simple and straight forward investment tools. It is ideal in a way that it is not only easy to understand and manage, but also prevailing to meet your short term goals in life as well as lay the basis for the long term goals.

What is Recurring Deposit (RD)?  

In banking language, the term recurring deposit refers to the periodic placement of a fixed sum of funds with a bank or financial institution with a definite tenure, usually between one and five years. At the conclusion of the tenure, the funds are naturally withdrawn by the depositor with accumulated interest.

WORKING

You need to simply put Recurring Deposits work by assigning a fixed amount of money that you choose, every month from your bank account and move it to the Recurring Deposit account the period you have specified. On this amount, the bank wages you interest which is equivalent to the interest you earn on a Fixed Deposit. Thus, they are Fixed Return Products. At the time of opening of Recurring Deposit account, the once-a-month installments and maturity date are decided between the investor and the financial institution/bank. If any installment is missed or overdue, interest payments towards the account are subtracted as a penalty, which is generally stated when the account is opened. The rate of interest on recurring deposit accounts is generally similar to that of fixed deposit accounts.

For more understanding, let us take an example:

Assume you can save Rs.10, 000 every month and want this money to be invested in RD for a year. You will have to apply to your bank to open RD of Rs.10,000 per month for a year. The bank will start the RD from the very day you send this request and then every month on that date. Thus, if you made a request for Recurring Deposit on the 5th of Nov, your next RD installment will be deducted on 5th, Dec, 5th Jan and so on till the termination of tenure. You will earn an interest that is equivalent to the bank’s FD interest rates, so if the FD gives 5% p.a.,same will apply to your RD and at the termination of your tenure, the total amount plus collected interest will be deposited to your bank account.

CALCULATION OF RECURRING DEPOSIT

Mathematically, the interest of recurring deposit is calculated by the following formula

Where “SI” stands for the interest, “n” is the time in months and r is the rate of interest per annum.

ADVANTAGES AND FEATURES  

1. Understanding it is easy as explained above.

2. Best for earning interest and saving money

With RD you can save money every month and it is a compulsory investment, so you save and also earn interest on the amount.

3. Very low principal amount

A Recurring Deposit can be opened for even Rs.100 with public sector banks and Rs.500 with private sector banks. Also, you may start an RD for as low as Rs.10 only if you open an RD account with a Post Office condition being that you have to personally deposit the money every month in this case.

4. It is like a Fixed Deposit with smaller payments

Fixed Deposits give eye-catching returns, but require a greater amount. If you do not have so, Recurring Deposit works best.

5.   Liquid product

RD is also a liquid product. If you need some funds in an emergency, then similar to a loan against FD you can avail a loan against RD as per the bank’s policy. Bank’s may charge a penalty of around 1% on the interest rate that is offered, when RD is closed prematurely. But even after this penalty, the amount credited into the account suffices for the requirement.

Now, as we are well versed by the concepts of RD, for someone who is confused how to go about their investments, RD is a good option. An RD will gradually open up roads for you and since it is so easy to understand Recurring Deposit, you will never know how quickly you go into the investment practice and earn good returns too.