Recurring Deposit: Definition, Meaning and Examples
As a business owner, one of your goals is, of course, to optimize your revenue and annual income. You can do this by building and growing your business, developing a strategy that will help you widen your customer base and increase your profits. As an eCommerce merchant, you need to offer ways for your customers to make payments online so that they can purchase from you. As you are achieving your goal of making a profit, you might also consider what to do with your income.
For some people, using a recurring deposit (RD) account is a good option when it comes to a safe and secure investment and savings tool. In this type of account, you commit to depositing a certain amount of money over a specific period of time.
What Does RD Mean?
The RD abbreviation stands for Recurring Deposits and refers to an investment account in which one chooses an amount to automatically deposit each month. Indian banks in particular offer this investment vehicle with terms that generally last from 6 months up to 10 years, with interest rates ranging from 3.5% to 5.5% per year for the public. Senior citizens are eligible to earn an additional .5% to .8% interest on their recurring deposits, creating a nice enhancement to one’s annual income.
What is a Recurring Deposit with an Example?
By way of example, let’s say that a certain ecommerce merchant is planning to upgrade his website in one year at a particular cost. He cannot be sure that he will have the full amount of cash available the following year. In order to ensure that he has the correct amount of funds that he will need at the right time, he can set up a recurring deposit account. With the help of his banker, he calculates exactly how much money he needs to deposit each month in order to end up with the total amount he will need for the website in one year. Taking into account how much interest will be earned, he is able to plan for the future and put away a small affordable amount each month knowing that he will have the lump sum when he needs it.
How does a Recurring Deposit Work?
A typical fixed deposit investment entails the commitment of a particular sum of money that is deposited all at once with the intention of withdrawing it with interest after a certain amount of time. During that time, it is usually possible to add or change the amount of money invested in the fixed deposit account. In a recurring deposit, on the other hand, a set amount of money (can even be a fairly small amount) is deposited each month. This amount is determined at the opening of the RD account. At the end of the designated time period, you get back your original investment plus interest earned throughout the time.
Types of Recurring Deposits
There are four types of recurring deposit accounts as described in the table below:
What is a Recurring Deposit Account?
A recurring deposit account is a savings account into which regular deposits are automatically made in order to earn interest and provide a safe investment that will pay out after a few months or years. Interest rates are generally compounded quarterly, and the product is designed for people who are interested in putting aside a relatively small amount of money each month in order to get a larger payout later. Recurring deposit accounts tend to earn a higher interest rate than typical savings accounts, for example, because there is no access to the money until the end of the designated time period.
How to Open an RD Account?
Opening an RD account is fairly simple for anyone who meets the following requirements:
- An individual
- A minor over the age of 10 with proof of name
- A minor 10 years of age or younger with a natural or legal guardian
- A corporation or commercial organization
- A government organization
- Application form from the bank
- Passport photos
- Proof of identity and address
- KYC documents if requested
Opening RD in a Bank
Once you have a bank account in a particular bank, it is easy to open a recurring deposit account, either online or offline.
- Online Application
Most banks allow you to open an RD account online via an easy online application as part of their regular online portal. If you are already a customer of a particular bank, it should be as easy as logging into your account and selecting the option to open an RD account. Then you will just follow the prompts and provide any requested information. You will choose the account from which you want the monthly installment to be debited, the amount of each installment and the time period. You will be given an interest rate and asked where the proceeds should be deposited at the conclusion of the time period. Once you have provided all the information, your application will be reviewed, and you will get an email confirmation.
- Offline Application
For those who prefer to apply in person, you can simply go to your local bank branch and fill out an offline application. You will likely be asked the same questions as on the online form, including the installment amounts, the method of monthly payment, the length of time, and where the proceeds should be deposited. The first installment can be made then and there with a check or cash once your application is processed.
Is There a Minimum Deposit Required?
Each bank can set their own minimums and limits for recurring deposit accounts. The minimum amounts are usually very low. Most RD accounts have a minimum deposit period of 6 months and a maximum of 10 years, with interest compounded each quarter.
Features of Recurring Deposit Account
While some terms can vary from bank to bank, most recurring deposit accounts share the following basic features:
Important Factors to Consider Before Starting a Recurring Deposit Account
While recurring deposits are generally considered to be very safe investment vehicles with the return all but guaranteed and limited risk to one’s annual income, there are still some factors that are worth considering before making an investment decision:
- Interest Rate - the interest rate offered may vary from bank to bank and can be anywhere from 3% to 8% with the rates dependent on the term of the deposit. Longer-term deposits will have slightly lower rates, as you will earn a higher amount of interest overall.
- Term Period - short term RD accounts are from 6 months to one year. Medium term RD accounts are from one year to five years, and long-term RD accounts generally last from 5 to 10 years.
- Premature Withdrawal - some banks allow for premature withdrawal but can charge a penalty, so if you think you might go for this option, choose one with a low penalty.
- Taxes - as with most investments and savings accounts, RD accounts are also subject to taxes, so it is important to understand what the implications will be for your specific case.
Benefits of Recurring Deposit
There are a number of benefits to investing a recurring deposit account, including:
A Simple Investment Product
An RD account is one of the simplest and easy to understand investment solutions offered. You simply deposit a set amount each month and know exactly what you will get at the end. No surprises. It is a very good place for a novice and risk-averse investor to start, and sets up good investing habits for the future.
Unlike investments in the stock market that can fluctuate and lose money, impacting annual income, when you make a recurring deposit investment you know that you will get a certain return on your principal based on the interest rate.
Flexibility of Tenure and Amount to be Deposited
There are lots of options that can suit just about any investor’s specific needs. You can choose an RD account with terms ranging from 6 months to 10 years with very flexible minimum deposit amounts.
Although there is likely to be a penalty involved for an early withdrawal, it is typically a small fee and would not prohibit someone from taking the money out early if it was really needed, such as a sudden unexpected change to annual income.
Most banks offer the option to easily take out a loan against a recurring deposit. Depending on the bank, you should be able to get a loan equal to 90-95% of the total in the RD account.
Fixed Interest Rate
The interest rate is set at the opening of the RD account, and you do not need to worry about future fluctuations. Interest rates on recurring deposit accounts are higher than those of traditional savings accounts.
Online Transaction Facilities
Most banks make it very easy to open and manage an RD account online. You can make the deposits and track your income using the bank’s app or website.
What is the Difference Between Recurring (RD) and Fixed Deposits (FD)?
Let’s clear up any confusion that may exist between fixed deposits (FD) and recurring deposits. It is easy to get them confused, as there are some similarities between the two, including:
- Whether you go with fixed deposits or a recurring deposit, both are fixed-income investments in that the interest rates are known and fixed at the beginning and do not change during the investment period. These rates do not fluctuate based on market conditions.
- In both fixed deposits and recurring deposit accounts, the investor knows exactly what the return will be and how much money will be received upon maturity.
- In both FD and RD accounts, premature withdrawal is allowed but requires payment of a penalty.
- It is possible to take out a loan against either a fixed deposit or RD account.
How to Calculate Interest Rates on the RD Account?
One of the advantages to investing in an RD account is being able to know exactly how much money you will have at the end of the term. This amount can easily be calculated using the monthly installment amount that you deposit, the interest rate that your bank has given you, and the length of time that you have signed up for. You can use a recurring deposit calculator found online in order to calculate exactly how much your total principal will be, the interest you will earn and the total maturity amount.
Can you Close a Recurring Deposit Account?
To close your RD account, you can go into the bank and submit a request in person, or you can do it online via the bank’s website or mobile app. Generally, the closure amount will automatically be deposited into the same account that the monthly installments were coming from, unless other instructions were provided.
If you close the account before the time of maturity, the bank can keep the interest that has not yet been paid - you will get back your full original investment but not the interest that you have not yet earned.
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