Recurring deposits get a makeover



A good old savings product has just gotten a significant makeover. Recurring deposits of the yore allowed you to put away small sums every month into a fixed deposit with the bank or post office. But there was a catch, you had to save the same amount every month, which did not allow your investment to grow with your income. The new ‘flexible' recurring deposit allows you to do more.

The flexible recurring deposit allows you to vary the amounts that you invest each month. This way greater interest can be earned on your investment, during months where you are able to save more.

As a debt product, it is nearly risk free and would hence be suitable for conservative investors.

Doing more

As many as seven public sector banks such as Punjab National Bank, Union Bank of India, Andhra Bank offer this flexible recurring deposit product.

Among private sector banks, only IndusInd Bank offers this product.

For the flexible recurring deposit, a ‘core' amount has to be specified by the investor at the time of opening the account. This is the minimum amount that needs to be invested every month.

What this product allows you to do is to vary your investment every month.

Sums of between 5-10 times your core amount can be invested, during months where you have excess cash flow or when you manage to save up more.

When you receive your Diwali bonus or quarterly incentives, dividends from shares of mutual funds, you can consider putting in an amount that is much larger than your core amount into the flexi recurring deposit. The core amount varies across banks from as little as Rs 25 to Rs 1,000 a month in some cases.

Tenures for which you can continue your flexible recurring deposits ranges from three months to 10 years. For example, if you choose a core amount of Rs 1,000, you need to make a minimum commitment of Rs 1,000 every month. You can step this up during months of surpluses to Rs 10,000.

Fine print

Unlike normal recurring deposits, this product carries an interest rate that corresponds to the normal term deposits that banks offer for any particular tenure.

So, if the bank offers 8 per cent interest for a deposit of 2 years, flexible recurring deposit too would carry the same interest rate.

However, it must be noted that the ‘stepped up amounts' would carry a different interest rate.

For example, if in a four year recurring deposit, you make an investment of Rs 1,000 in the first month and say Rs 2,000 in the 12th month, the Rs 1000 ‘excess' instalment would carry an interest applicable for a tenure of three years, which may be different from that pertaining to a four-year period. The core amount would always earn interest that is applicable to the original deposit tenure.

The other important aspect to note is that interest on the monthly deposits is calculated based on the least balance between the 10{+t}{+h} and the last day of the month.

Any instalment made before this date would earn full interest, while those made after would come into the picture only in the subsequent month.

Banks allow you to also make multiple instalments during a month, subject to it not exceeding the upper limit.

Interest rates and yields

With relatively higher deposit interest rates prevailing currently, it may be a reasonable good time to benefit from them for a fixed tenure.

This product is suitable for those who do not a have a single large or lump-sum to invest and wish to build wealth over a period of time. Interest rates range from 8-9.5 per cent for 3-5 year deposits.

Choose an appropriate tenure to maximise returns and to also potentially coincide with a long-term goal for e.g. your child's college fees, daughter's marriage etc.

If one were to start a flexible recurring deposit for a period of say five years at an interest rate of 8.5 per cent compounded annually, an investment of Rs 1,000 every month would result in the accumulation of Rs 74,338 at the end of five years.The Rs 14,338 that is earned as interest is of course taxable, though there is no tax deduction at source.

The pre-tax effective yield in this case works to about 10 per cent.This is still much higher than the savings bank interest rates. If you step up investments, the accumulation would be higher.

It is important to note that, the product cannot be opened for special tenures such as the 333 days, 555 days etc.

Andhra Bank and IndusInd bank provide additional interest rates for senior citizens, as is applicable in the case of term deposits.

Indian Bank also allows receipt of monthly interest pay out on these deposits after a certain period.

Banks also allow you make your monthly payments through your existing net banking account.

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