Risk and returns: A Comparative Analysis of FDs and RDs

Posted on Friday, February 2nd, 2024 | By IndusInd Bank

Fixed deposits and recurring deposits are among the popular options for earning steady returns with low risks. Both these options are preferred by conservative investors who wish to park their savings in secure instruments. While fixed deposits provide lump sum returns at maturity, recurring deposits facilitate monthly savings and returns. This article will analyze and compare the risks and returns associated with fixed deposits and recurring deposits in the Indian market.  

Fixed Deposits  

A fixed deposit or term deposit allows investors to deposit a lump sum amount for a fixed tenure ranging from 7 days to 10 years. The amount remains locked in for the chosen tenure and earns a predetermined rate of interest. At maturity, the investor gets back the principal along with interest.  IndusInd Bank offers attractive interest rates on fixed deposits across tenures. The bank provides flexible options for interest payment (monthly, quarterly, half-yearly, annually or at maturity) and the convenience of booking FDs online through Netbanking/Mobile banking. IndusInd Bank FDs can be opened for a minimum of Rs. 10000. 

Fixed deposits are considered a low-risk investment due to guaranteed returns. The returns are fixed at the start of the tenure and are unaffected by market fluctuations. Principal protection makes it a favoured option for conservative investors and senior citizens. FD interests are also taxed as per the income tax slabs of the investor. 

Recurring Deposits 

A recurring deposit (RD) facilitates systematic savings where a fixed amount is invested every month for a preset tenure. The lump sum maturity amount includes the savings and interest compounded monthly.  IndusInd Bank RDs can be opened online by providing basic KYC and registering for standing instructions to transfer the fixed monthly instalment from the linked savings account. The minimum monthly investment stands at Rs. 500 for a tenure ranging from 12 months to 120 months.  

The interest rate offered by IndusInd Bank on RDs depends on the tenure selected. Equated Monthly Installments (EMI) make RDs a good tool for inculcating discipline in monthly savings. Interest earned is taxed as per the income tax slab. 

Analysis of Risks and Returns 

In terms of returns, fixed deposits have an edge over recurring deposits due to higher interest rates. Investors locking in money for longer tenures in FDs can earn higher interest rates. 

However, RDs score over FDs in terms of liquidity. While the full FD amount remains locked till maturity, RDs allow partial withdrawal of savings after a specified period say 1 or 2 years.   

The risk of default is negligible with both these options as deposits are made with scheduled commercial banks regulated by the RBI. Principal protection reduces investment risk. However, the opportunity cost of blocking funds for a fixed tenure needs consideration in high inflation periods. 

The returns from FDs and RDs are fixed and hence unaffected by market movements or volatility unlike stocks, mutual funds or other market-linked products. This makes them a preferred investment avenue for investors seeking stability of returns without assuming risk. 

Conclusion

Both fixed deposits and recurring deposits are viable investment tools to earn assured returns by parking monthly/lump sum savings in a disciplined manner. While FDs are optimal for investments above Rs. 10,000 with flexibility in interest payouts, RDs work better for those looking to save smaller amounts regularly each month. Overall, the risk-return profile makes them suitable for risk-averse conservative investors prioritizing capital safety over maximizing returns. 

Disclaimer: The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. Hence, you are advised to consult your financial advisor before making any financial decision. IndusInd Bank Limited (IBL) does not influence the views of the author in any way. IBL and the author shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information.