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Advantages and Disadvantages of Recurring Deposit Account

Posted: 23rd May, 2022

Updated: 8th February, 2023

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What is a Recurring Deposit?

A recurring deposit is a scheme provided by banks and financial institutions whereby a predetermined amount is set aside for a specified tenure. The key differentiating feature between a recurring deposit and a fixed deposit is the way of investment. An investor needs to invest a lump sum amount while creating a fixed deposit for a specified tenure. However, you can invest like a SIP over a predetermined tenure with a recurring deposit scheme. But is it beneficial?

Well, indeed it is. Here are some of the advantages and disadvantages of a recurring deposit account.

Advantages of Recurring Deposit Account

While the recurring deposit scheme looks attractive, it is beneficial to the customers. Here are some of the critical advantages of recurring deposit account:

  • Online Investing: Investing in recurring deposits has become easier than ever. Thanks to the internet and digital revolution, you can invest online in a simple and hassle-free manner. You just need to select the financial institution that offers the best scheme in line with your investing goal and visit their website. You can open your recurring deposit account, close your RD account, deposit money, view transactions, etc., online.
  • Facilitates Achievement of Short-term Goals: You can grow your capital to meet your short-term goals with recurring deposits. The key here is to ensure the safety of capital invested and not the lucrative returns by taking risky positions. Therefore, investing in schemes like recurring deposit accounts allows you to systematically save over a period of time, while allowing your investments to grow without taking any risk.
  • Lower Risk: Recurring deposit schemes are as secure as your savings and fixed deposit accounts. This is what makes it a preferred choice for risk-averse investors. Recurring deposits are especially for those who prioritise the security of the capital invested over returns.
  • Disciplined Investing: Wealth generation requires discipline. Whether it's about your earnings or investments, a recurring deposit will inculcate the habit of investing in you. This will prioritise investing over any other expense in your budget. There is no reason why you won’t become wealthy if you adopt a disciplined approach toward investing in the long run.
  • Lucrative Returns: Another significant advantage of a recurring deposit account is that it offers lucrative returns. You can find them surpassing the interest offered by fixed deposits as well. While each bank's interest rates are different due to different policies and guidelines, in general, you can earn an interest anywhere between 7% to as much as 9% per annum. And remember, these are the returns with minimal to no risk!
  • Flexible Recurring Deposit Account: Some financial institutions also offer a flexible RD account. With a flexible RD account, you don’t need to worry about skipping on investment for a particular month as you won’t be penalised for it. Also, a flexible RD scheme will allow you to prematurely withdraw funds from your recurring deposit account if you require it.

Thus, recurring deposits offer lucrative returns, minimal risk, and flexibility for investing and withdrawal. However, everything has its pros and cons. What could be the cons of investing in recurring deposit schemes?

Disadvantages of Recurring Deposit Scheme

Following are some of the disadvantages of the recurring deposit schemes:

  • Premature Withdrawal: Recurring deposits come with a lock-in period determined while opening the recurring deposit account. Although premature withdrawals are allowed, it certainly comes with a cost. The investor will either have to compromise on the interest rate or pay penal charges for the early withdrawal of funds. Many institutions also provide for the repayment of the amount prematurely withdrawn. Once the amount is repaid, the interest rate becomes normal again.
  • Returns: While the returns of RD schemes seem lucrative, they are still moderate compared to market-linked returns, usually offered by mutual funds and other stock markets instruments like equities and bonds. While investing in market-linked instruments comes with risk, investors are usually compensated for the risk they undertake in the form of higher returns.
  • Liquidity: There might arise a situation whereby you are in immediate need of funds. Recurring deposit locks in your funds for the predetermined tenure your investments are made. Unless the funds are invested in flexible RD accounts, this can create liquidity issues if you urgently need funds. While some financial institutions can allow withdrawal of funds, they might levy penalty charges for withdrawing prematurely.
  • Monthly Instalments: While disciplined investing is good, it can sometimes be a trouble, especially when running short of funds. You will always have to prioritise and set aside the amount you invest in your RD account each month. Therefore, it is always wiser to preplan your expenses to avoid missing out on your instalment. Skipping out instalments can attract unnecessary penalty charges.

In a Nutshell

Want returns but also want to minimise risk? That is what recurring deposits offer to the investors. Being a blend of mutual funds and fixed deposits, you can do stressless investing and watch your investments grow over investment tenure. Are you investing in the recurring deposit? If not, then start investing now!

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Premature Withdrawal of Recurring Deposit
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