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Recurring Deposits and their importance
Indian Banks offer a special term deposit known as a recurring deposit or an RD. An RD is an investment platform that allows investors to make regular installments and helps them yield stellar returns. Due to the regular deposit factor and an interest component, it also provides flexibility and convenience of investment to users/individuals. However, it's important to note that RDs are not the same as Fixed Deposits/FDs. In most ways, RDs are adaptable. An RD account holder can opt to invest a set amount each month and reap a reasonable rate of return. RDs are a great way to save and invest at the same time.
How and why are Recurring Deposits significant for small businesses?
Small businesses are difficult to run and battle various issues, such as not generating enough sales to cover expenses or having lower margins than larger companies, lowering overall profits. As a result, a recurring deposit is a brilliant low-risk plan for small businesses to supplement their income in the event of a good couple of months.
Let us now learn why should a small business invest in a recurring deposit and the benefits it will reap:
1. Interest Rate of Recurring Deposits:
The interest rates of RDs depend on the amount deposited and the tenure. Generally, fixed deposits and recurring deposits have similar structures of interest. However, in RD, the interest varies from 7.25% to 9%. This depends on the bank where the business has deposited the amount and the plan tenure selected. Every small business should use an RD calculator to find out and calculate the exact amount of interest they would accumulate for the amount they have deposited, the tenure of the deposit, and the interest rate.
2. Planning short-term goals:
Investing in an RD is 100% risk-free, and the rewards are guaranteed. If a business has short-term investment goals, mutual funds and stocks might not be the best solution. Because of this, enterprises aiming at short-term goals in the range of one to three years should choose to invest in RDs. This will help build up the savings for the business. Having a recurring deposit will also help the business owner plan their personal investment goals since short-term goals like child's education, trip abroad, and marriage can also be fulfilled using the same.
3. Ease of Investment:
The ease by which a small business can open a recurring deposit is hassle-free. The documents needed for opening are easy to arrange in a short period. Depending on the bank that the business is trying to open a recurring deposit account in, they need to open the RD account by linking it to their savings account. If they already have a savings account, it becomes even more accessible, they would need to link it, and the work is done.
4. No penalty for missing premium:
A few banks offer adaptable Recurring Deposit plans where the small business that has invested in the recurring deposit won't be punished, assuming the sum of the premium for that particular month isn't deposited during that specific month. Likewise, in a flexible RD scheme, a business can pull out the RD account amount whenever required. Considering that saving for business is essential, giving them an option of withdrawal is also essential, making the scheme even more interesting for small businesses.
5. Premium amount:
An RD is beneficial for small businesses because they don't feel compelled to set aside funds consistently. One of the most essential benefits of RD is that a small business can begin with at least Rs 2,000 every month. On the higher side, the highest monthly premium for RD can go up to Rs 75,000. A business would need to focus on a proper period on many investment items. This usually is 12-24 months. Since the commitment period of RD is much lower than other investment types, it acts as an added advantage to the depositors.
SIP or RD? What is the best option for a small business?
In a SIP, a small business can put money into mutual funds monthly or quarterly. They can do the same by depositing a limited quantity of cash. The sum of the money that will be deposited quarterly or monthly can be just about as low as Rs 500. Based on the plan the company has picked, the mutual fund manager will dispense the sum either in debt or equity. Mutual Funds create preferable returns over RDs or fixed deposit plans. However, in SIP, the return depends on the scheme chosen and the equity and the debt market. If there is a change in the market, there is a high chance of getting less to no returns. Since the risk capacity of a small business is extremely low, investing in SIP would be a massive risk for them, and they might not feel secure. However, saving in RDs is a much safer option since small businesses need hard cash at all times.
RD - The correct path to choose
Assuming that the goal of any small business as a responsible investor is to be disciplined financially, there could be no more excellent way of investment than a recurring deposit. This is also a great option assuming that every small business can save a minimal quantity of cash every month. A small business should never forget that the outcome will be sufficiently fulfilling regardless of how small they are saving every month.