Fixed and recurring deposits are popular investment options primarily because these are almost risk-free. Compared to market-linked instruments like mutual funds and shares, these are safe investments that provide guaranteed returns.
Choosing between these two may be confusing. To help you make an informed decision, here is an insight into both these investment avenues.
Fixed deposits (FDs) are products that come with a pre-determined maturity date and defined returns. You invest the principal when you open the FD, and you receive the maturity at the end of the investment tenure.
When you start a recurring deposit (RD), you pay an agreed amount at regular intervals. The interest is fixed; it is added to the principal and paid on maturity.
Pros and cons of FDs
FDs allow you to save and grow your money over a period. Some of its advantages include:
- It is a safe investment option that provides guaranteed returns based on the FD interest rate at the time of opening the deposit
- It helps in financial planning, as you know the maturity date and amount
- You can opt for a loan against the FD in case of a liquidity crunch
- You may choose between cumulative or non-cumulative fixed deposit interest rate payout as per your requirements
While FDs have several benefits, a few disadvantages are:
- Interest earned on FDs is included in your taxable income. Additionally, the Tax Deducted at Source (TDS) is applicable for interest earnings exceeding INR 40,000
- FDs have a fixed duration, and if you withdraw the money before its due date, you will have to pay a penalty for premature withdrawal
Pros of RDs
RDs help to:
- Plan short-term goals
- Save with smaller amounts and inculcate financial discipline
Cons of RDs
- Interest is lower than the FD rates
- Premature withdrawal is not allowed
- No flexibility to modify the RD amount
If you want to invest a high lump sum, an FD is the better choice. However, if you are earning a nominal salary, and want to start saving a small amount regularly, consider starting an RD.
If you wish to earn more returns, opting for a cumulative FD can prove beneficial. In this type of Fixed Deposit, the interest gets added to your original principal, helping you increase the returns. Use an online FD calculator available on the Mahindra Finance website to know more.