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SAVINGS

RD, steady and go

Recurring deposits are becoming more popular, but they have their limitations

Asish Saraf, 39, is a regular investor in recurring deposit schemes. “It is like balancing your investment portfolio,” says the chief audit executive of DHFL in Mumbai. “Investment in RDs also depends on your risk appetite and I, being from an audit background, am a bit conservative in my approach. I also look towards low-risk investments like RD where your returns are low, but fixed. Investments in market-linked investment plans such as mutual funds have a huge risk involved as the markets can fluctuate and, at times, can be volatile. At the end of the day, the returns depend on the performance of the mutual fund in the market.”

There are penalties levied on missing monthly instalments and premature withdrawals. these can dent the rate of return on your RD. - Naveen Kukreja, CEO and cofounder, Paisabazaar.com
Unlike earlier times, where you had to go to the bank to open an RD and deposit money every month, all this can be done online in a matter of minutes. - Navin Chandani, chief business development officer, BankBazaar.com

Undoubtedly, RDs have gained popularity in India primarily because of the extensive network of banks and post offices. Their monthly investment requirement, which can be as low as Rs50 a month, makes them the best option for small savers. While their assured returns have made them popular among investors averse to risk, the lack of awareness about superior, low-risk instruments, like debt mutual funds, has kept that loyal base intact.

“Recurring deposit is most advantageous for those who lack financial discipline,” says Naveen Kukreja, CEO and cofounder of Paisabazaar.com. “By ensuring automatic deduction of a preset amount at a pre-determined date, RD ensures forced savings. With a minimum monthly deposit, they are also ideal for small savers who cannot save enough to meet the minimum deposit criteria of fixed deposits. While their tenure can range anywhere from six months to 10 years, one can close one's RD prematurely by paying a premature withdrawal penalty. Alternatively, one can avail a loan by using his RD as security.”

Naveen Kukreja

Experts such as Pralay Mondal, senior group president, retail and business banking at Yes Bank, feel that the reason for the sudden popularity is an increasingly volatile environment. “Customers are looking at safer avenues of investment,” he said. “Recurring deposit, a traditional choice of investment, offers simplicity in its product offering, while preserving investor gains. RD not only offers stability and reliability of rates, but is also a convenient means of investment for small investors. With the median income range in India well below that in developed economies, the majority of the populace is looking at stability of returns over volatile or higher bets.”

Rajiv M. Ranjan, founder and chief managing director of Mumbai-based BigWin Infotech, says that right from childhood, we imbibe the habit of saving. And, consumers are increasingly getting educated and understanding the power of short-term savings, which is playing a key role in fulfilling their short-term financial goals.

“Currently, RD schemes are gaining preference because they allow investment from people who do not have lump sum amount, but are still looking to invest a set amount every month for a predefined tenure,” he says. “Also, leading banks are now offering attractive interest rates, so customers can gain the maximum out of their investments. At the same time, consumers' financial goals are changing. They are doing financial planning to secure short-term goals such as yearly education fees for their children, managing marriage expenses, vacations abroad, home furnishings and renovation.ww”

Ranjan adds that, ever since the rise of the fintech industry in India, banking operations are now at the customer's fingertips. This is making owning an RD account much more preferable.

Navin Chandani, chief business development officer at BankBazaar.com, says that RDs allow people to save in a regular and structured manner. And, as RDs have a specific time frame, it allows people to plan their goals and save towards them. “Unlike earlier times, where you had to go to the bank to open an RD and deposit money every month, all this can be done online in a matter of minutes. All these factors, when put together, make RDs a very attractive proposition,” he said.

Navin Chandani

However, RDs have disadvantages, too. The biggest is their low returns. “For those in the higher tax slabs, the post-tax returns of RDs hardly beat the inflation rate,” says Kukreja. “This makes RDs unsuitable for meeting mid- and long-term financial goals. If one is willing to take a little extra risk, a systematic investment plan in direct plans of ultra-short term and short-term debt funds can offer superior post-tax returns for meeting short-term goals. Those investing for long-term goals should opt for SIPs in direct plans of equity mutual funds. Besides that, there are penalties levied on missing monthly instalments and premature withdrawals. If incurred, these two penalties can significantly dent the rate of return on your RD.”

Mondal also feels that the RD locks the interest rate, thereby ensuring nil volatility in rates. “While it is pro investor in a declining interest rate regime, it may not be the same in a contrasting environment,” he says.

Experts like Ranjan say that, with RD, you do not have the privilege of withdrawing any part of the money until the term is over. “If you are looking for an instrument that allows easy liquidity, RDs are a bad fit,” he says.

Interestingly, RDs provide returns similar to fixed deposits, and have the same tax rules. So, they are not enough to build a retirement corpus over the long term as the returns after tax would not be inflation-proof. “In the case of RDs, one cannot change one's deposit amount, regardless of your financial situation at the moment,” said Chandani. “This can be a problem for investors who have fluctuating incomes.”

RD VERSUS FD

Experts such as Navin Chandani, chief business development officer at BankBazaar.com, say that the primary difference between FDs and RDs is that the former is a one-shot investment for a set period, whereas the latter is a periodic investment for a fixed duration. “The interest rates and tax liabilities of RDs and FDs are similar. However, FDs tend to give a higher rate of return,” he said. “Say you invest Rs 24,000 in an FD at the start of the year versus Rs 2,000 per month in a recurring deposit for a year. Both these products offer you a 8 per cent rate of interest compounded quarterly. At the end of the year, the FD will give you an interest of approximately Rs 1,650, while the RD will give you an interest of approximately Rs 1,060. In an FD, you invest a lump sum amount that earns interest for one year. However, in an RD, the first instalment earns interest for 12 months period, the second for 11 months, third for 10 months and so on. Hence, the FD gives a higher maturity amount.”

Similarly, banking experts point out that RDs and FDs differ in the timing of the investment. “The primary reason is that in FD you invest a lump sum amount, and so the entire money earns interest for one year, and, hence, customer will have a higher yield,” said Pralay Mondal, senior group president, retail and business banking at Yes Bank. “However, RDs inculcate the discipline of saving, which help people in the long run.”

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