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FD (Fixed Deposit) vs RD (Recurring Deposit): Which Is Better?

FD (Fixed Deposit) vs RD (Recurring Deposit): Which Is Better?

We Indians have a soft corner for risk-averse investments. And, why not? Diversifying your finances between market and non-market instruments awards you a well-balanced financial portfolio. This philosophy is what makes fixed and recurring deposits two of the safest and most preferred investment vehicles.

Even though both FDs and RDs offer guaranteed returns and are not market-linked, they do feature significant differences. Let's understand them in detail.

Fixed deposits vs recurring deposits

Differentiating ParameterFixed Deposit (FD)Recurring Deposit (RD)
Frequency of depositsAs the name suggests, a fixed deposit is an instrument where both the interest rate and the deposit amount remain fixed until maturity.   Investors can open an FD with only a lump sum, and they cannot keep depositing more money in the same FD.A recurring deposit doesn't function on lump sum payments. Here, investors deposit a pre-fixed amount every month.   However, the rate of interest of an RD is fixed at the time of opening the account and remains the same until the entire RD tenure.
Minimum depositThe minimum deposit amount to open an FD depends entirely on the financial institution you choose. Typically, investors can open an FD account with as little as Rs. 100.Similar to FDs, the minimum deposit amount for RDs also depends on the financial institution you choose. Typically, investors can open an RD with as little as Rs. 1000.
TenureThe tenure range for an FD is relatively more flexible as the investment is a lump sum. So, it can range from a few days to several years.The tenure range of an RD is always at least a few months, as this is a monthly deposit scheme. Usually, RDs offer a minimum tenure of 6 months, and maximum tenures can range up to several years.
TaxationYou can claim a tax rebate on any FD up to Rs. 1.5 lakhs under Section 80C of the ITA. Recurring deposits are not tax-exempt under Section 80C of the ITA or otherwise.
Nature of returnsDepending on your FD terms and conditions, you can receive interest payout on maturity or at regular intervals that are monthly, quarterly, half-yearly or annually. Most RDs pay interest on maturity along with the principal amount. 
Interest RatesSince fixed deposits are lump sum investments, which may earn compound interest depending on the interest payout clause, they tend to earn higher interest returns. Since recurring deposits accept monthly payments and earn compound interest on smaller amounts, they tend to earn lower interest rates than a fixed deposit.
LiquidityFixed deposits come with soft lock-ins, meaning you can break an FD before maturity but may be charged a nominal penalty, which is deducted from the interest earned. However, you will be entitled to the rest of the interest amount.When it comes to liquidity, RDs are similar to FDs. You can break an RD before maturity but will most likely be charged a penalty which is usually deducted from the interest accrued. You're, however, entitled to the remaining interest along with the principal amount.

Which to choose?

No one instrument is better than the other. Both FDs and RDs are safe options that offer modest guaranteed returns. However, the decision to pick one depends on your current financial capability. If you're sitting on a lump sum of funds, open a fixed deposit. If not, you should still save and earn interest on smaller amounts lying idle in your account. You can do this by opening an RD.

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