Pros And Cons Of Recurring Deposits (RD)
Banks have started to lessen their interest rates on deposits and investors, who don’t have extensive sum of money to invest in the FDs (Fixed Deposits), can take a gander at investing on RDs (recurring deposits).
How does a Recurring Deposits work actually?
RDs are similar to SIP in Fixed Deposits. You’ll need to select the investment amount, which you are able to deposit each month as well as the term. On the other hand, you should make certain that you have the capacity to pay the amount each month on the grounds that any deferral in the installment will alter the amount of maturity because of the application of penalty. Most of the banks don’t permit incomplete payment, nor would you be able to pay more than the decided sum.
The base parity of deposit as well as tenure differs from one bank to other. While in post offices, you can begin a Recurring Deposit with only Rs. 10, with the SBI, you can begin a RD with a base amount of Rs. 100 only, while for some private banks, the base deposit is Rs. 500 every month. A few banks don’t have any endorsed upper limit, few private banks permit you to contribute up to Rs. 14.99 lac every month. An RD account in post office is like a RD of a bank, at the same time, has a set term of 5 years. However in any bank, the duration of Recurring Deposit tenure can be from six months to 10 years.
Technique for Acquiring Interest
In a Recurring Deposit, you procure an interest/premium on compounding basis. Commonly, the aggravating is quarterly. Therefore for example, on the off chance that you began a Recurring Deposit of Rs. 1000 from the month of January in 2012, the interest/premium earned on the capital invested in the month of February will be computed for eleven months, whereas your Recurring Deposit in the month of March will acquire interest/premium for ten months.”
Rate of Interest in RD
While in few banks, for example, SBI, propose the same interest/premium for a Recurring Deposit as well as for a Fixed Deposit, there are additional banks who propose lower rate of interest for Recurring Deposits, contrasted with the Fixed Deposits. Therefore, do think about the rates of the banks before you invest. Case in point, HDFC Bank proposes 7.25% interest rate on RD for one year, whereas on a consistent Fixed Deposit of 12 months and from first day to 12 months and fifteen days, the interest rate is about 9%, whereas for a Fixed Deposit of 12 months and sixteen days, the rate of interest is 9.25%. The bank proposes 8.5% for Recurring Deposits of 15 and 24 months, 9.25% for 27/36/39/48/60 months.
TDS Now applicable in RD
This is a bad news from June 1 2015 now TDS would be applicable on RD also. Initially RD were exempted from TDS. A TDS of 10% would be deducted from your interest under section 194A. This rule is similar to FD this means that no TDS would be deducted if interest earned in your RD is less then rs 10,000 per year.
Withdrawals and Renewal of RD Accounts
Amid the untimely conclusion of the Recurring Deposit for reinvestment, interest/premium will be remunerated to the holder of the account without reducing the rate of interest by one percent (as a penalty).
In the event that the holder of the account doesn’t stay with a particular bank after untimely conclusion of the account, then the rate of interest will be (rate of interest-1% of penalty).
Fractional withdrawals aren’t allowed in RDs; however a few banks propose the facility of getting a loan against the Recurring Deposit, where the account of RD will be taken as guarantee.
Untimely withdrawals are conceivable; however the interest rate will be lesser than the actual rate of interest (which is about 8.40%).
In Short, Pros & Cons of RDs
Pros and Benefits of RD
No vacillations in RDs contrasted with the SIPs that are equity linked; consequently the profits depend on the performance of the securities exchanges.
Covered by the Deposit Insurance as well as Government’s Credit Guarantee Scheme, and are among the most secure investment alternative.
RDs have a Higher FICO score contrasted with the more dangerous equity based Systematic Investment Plans (SIP).
Cons and Drawbacks of RD
RDs give predictable, yet low returns that during the times of unverifiable economies can’t cover the pressures of inflation.
Although the RDs offer sheltered and settled returns, however during bull market times, they can’t underwrite the profits from business sector.
It is wrong to say which one is better, RD or FD, as the investor’s risk appetite is all which is vital at last. It is by and large encouraged to the young financial specialists to make a blend of both schemes with higher extent of SIPs, in light of the fact that they are able to take risk, while for more seasoned and more traditionalist investors RDs are more prudent. Be that as it may, it is totally at the attentiveness of the investor to pick the alternative, which is coordinating his/her needs.