Good ol’ RD for systematic investment

Recurring deposits are a good choice to balance your portfolio risk and create wealth

Is the volatility in equities worrying you? While equities are a good asset class to generate healthy long-term returns, it is important to balance risk, particularly if you are a conservative investor. There are several investment options available that can help you get stable returns while keeping your portfolio risk low. Recurring deposit schemes offered by banks is one such vehicle you can use for wealth creation.

The advantage an RD scheme offers over a traditional fixed deposit scheme is that the former not only provides a fixed rate of return on your investment but also helps inculcate the habit of saving in a systematic way.

Under a recurring deposit scheme, one can invest a pre-decided sum of money at regular and pre-agreed periodicity. The minimum investment varies across banks, ranging from as low as ₹100 in the case of public sector banks such as Central Bank of India and select small private banks such as Bandhan Bank, to ₹1,000 by large private banks such as HDFC Bank. In contrast to a FD, where you need to invest at one go, an RD gives you the flexibility to invest over a period of time, such that you have liquidity to meet any contingency.

Interest rates

The rate of interest on an RD scheme also varies across banks and depends on the investment tenure. Most banks offer interest rates that are is largely comparable to that of their FD schemes — 5-8 per cent depending on the tenure of the investment.

Private banks such as HDFC Bank offer higher rates than their State-owned peers. For instance, if you are looking at a tenure of 27-36 months, you can earn an annualised interest of 7.4 per cent. If you are a senior citizen who has completed 60 years of age, you are entitled to an additional 0.5 per cent. New-age banks that are looking to increase their deposit base offer a little more interest than large private banks. Bandhan Bank, for instance, offers up to 7.65 per cent for non-seniors. Also, some of these banks offer a higher incentive for senior citizens. Bandhan Bank offers an additional 0.75 per cent for senior citizens.

Besides this, deposit-taking NBFCs also offer RD schemes and the interest rates are often higher than that offered by banks. However, one needs to tread with caution while investing in such RDs offered by NBFCs. This is because deposits parked with banks are insured by the Deposit Insurance and Credit Guarantee Corporation, up to ₹1 lakh per depositor. In contrast, there is no insurance cover for deposits parked with NBFCs.

You can choose the scheme tenure based on your investment goals and financial commitments. Most banks offer RD schemes for periods ranging from six months to as long as 10 years. Once you decide on a tenure, it cannot be changed.

Though the tenure is pre-decided at the time of opening the account, in case you need liquidity to meet some exigency, the RD investment can come handy. There are two ways to use your RD for emergency. One, you can opt to borrow against the balance in your RD at a concessional rate. Some banks offer it as an overdraft facility once you complete a stipulated number of instalments. Bandhan Bank offers overdraft after six months.

You can also choose to pre-close your RD. Most banks allow you to close your RD prematurely, of course, after deducting the penal interest from the interest earned by you till date. The penal interest is typically 1-2 per cent.

Some banks, instead of charging a penal interest, re-calculate the interest at the rate at which the deposit was made or the base rate applicable for the tenure for which the deposit amount was with the bank, whichever is lower.

Interest is typically calculated from the date on which the deposit was made with the bank, and is paid only upon maturity. Tax is deducted at source on the interest earned, if it exceeds the threshold. The interest income threshold for TDS, which had been ₹10,000 until 2018-19, was increased in the recent Budget to ₹40,000. Banks typically deduct the tax from the savings bank account.

In case your overall income is below your tax slab, you can request the bank to not deduct TDS by submitting Form 15G (Form 15H for senior citizens).

Nomination facility is available in RD schemes, too.

How to invest

If you are an existing account holder, you can open an RD account using internet banking. You can also walk into the nearest branch of the bank and submit a duly filled application along with requisite documents.

While an RD is a good vehicle to invest systematically, you can invest only a pre-agreed sum every month. Also, there is no regular interest payment as the cumulative interest along with the principal is payable only upon maturity.

To invest any windfall or surplus income, you need to open another RD account or explore alternative options such as FDs or flexible RDs.

The writer is an independent financial consultant

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