Benefits of Recurring Deposit (RD)

Benefits of Recurring Deposit

An old Marwari, during his conversation regarding money habits, quotes “To generate new money, first you must have some money” and “only money can grow money”. The question that arises is how to get that money to invest and let it grow? This usually the young and risk seeking investors, who do want good returns.

A product that does not require a large investment, but offer guaranteed returns, is a sure gem for these investors. In this article, we explore one such product that has been there for quite a long time and at some time in the past, was the prime investment choice: Recurring Deposit. It can often be referred to as a reverse product of a loan, where depositing funds regularly for a certain amount of time reaps good return.

Let’s have a look on a few points that make recurring deposits an evergreen investment.

1. Rs. 100 Investment: Recurring deposits can be started for as low as Rs. 100/-. This amount is phenomenally low when we compared to mutual funds or fixed deposits, which take as much as Rs. 1000-5000 for regular intervals deposit. Further,you don’t even need to deposits on a monthly basis as options such as quarterly investments have also popped up.

2. Pre Mature Withdrawal quite a number of deposits do require certain time period of lock in period and the investor cannot redeem it. When it comes to recurring deposits, you can avail pre Mature Withdrawal at cost of 1% penalised interest. For instance, if you have invested at 7%, you can wrap your refund with 6%. Thus even upon paying a penalty interest, you reap more returns than a normal savings account.

3. Flexible Deposit Schemes: Flexible deposit  schemes come in handy when you are not sure about the amount you want to invest or your monthly income varies. Only a few investment vehicles provide this facility, and the good ol’ recurring deposit is one of them.

You can start can recurring deposit at Rs. 100 and then can go as high as Rs. 1000, for one month and switch down to Rs. 100 or 500, when expenses escalate.

Flexible Deposit Schemes in RD may vary from bank to bank, but can have a massive effect on returns and ability to save.

4. Pre planned investment : The art to good financial planning recommends a pre planned investment strategy for every year. However, due to certain exigencies or procrastination, people usually fail in planning or its execution. Servicing a 25K or  40k instalment towards a life insurance policy becomes quite difficult as it forms a major expense. Pre planning these investments with accumulation investments like recurring deposits, thus gets justified.

5 Guaranteed  Returns: A pure bank and post office investment scheme, recurring deposit provide guaranteed return to the investor. In these volatile economy, who doesn’t want a fixed return plan? Keeping every inch of your investment and returns you are getting right when you get invested is always wise irrespective of the duration, risk profile and class.

6. Interest Rate Risk Protection: Indian banks have a peculiar feature of giving loans at a floating rate and taking deposits at fixed rate of interest. This gives the consumer relief from interest rate risk, meaning that the investment, once made at a particular interest rate, would continue to be at that rate even if falls afterwards. This makes a recurring deposit safer I’m terms of interest risk variation.

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