Recurring Deposit 101: Really Reliable Returns

Why should we do Regular Investment?

Regular investment is crucial for financial success as it controls the power of compounding, allowing wealth to grow over time. It also helps manage the risk of rupee depreciation or inflation in the economy. Therefore, consistent investing builds financial discipline, ensuring systematic wealth creation and long-term security.

Hence, today we will explore Recurring Deposits, also known as RDs. If you’re looking to save some money and earn a bit of interest, RDs might be perfect for you.

What is a Recurring Deposit (RD)?

Recurring Deposit (RD) is a type of fixed-income investment where you deposit a fixed amount of money every month for a predetermined period. It is a popular savings scheme in India, offered by banks, NBFCs, and post offices. The deposited amount earns interest, which is usually compounded quarterly, and the total maturity amount (principal + interest) is received at the end of the tenure.

A unique sort of deposit account that banks offer is known as a Recurring Deposit. They function like this:

• Each month, you deposit a set amount into the account.
• The bank pays you interest on the money you have deposited.
• When the agreed time ends, you get back your original amount plus the interest earned.

Key Features of RDs:

• Dedicated Monthly Deposits: The minimum deposit amount starts at ₹50 in rural and semi-urban areas, and ₹100 in urban and metro areas. However, you have the flexibility to choose the amount you wish to invest monthly.
• Rates of Interest: The interest rates for Recurring Deposits range from 5.25% to 7.85% for normal citizens and 5.75% to 8.35% for senior citizens, depending on the bank. Moreover, the recurring deposits frequently yield higher rates of interest than standard savings accounts.
• Duration: You have the option of selecting the period for which you would like to maintain your investment in the recurring deposit, typically ranging from 6 months to 10 years.

The formula used to calculate the maturity amount of a Recurring Deposit (RD) is:

A = P X (1+R/N)(Nt)

Where:

• A represents the final maturity value of the RD, which includes both the principal amount and the interest earned over the tenure.
• P refers to the monthly installment or the amount you contribute every month towards the RD.
• R is the annual interest rate, expressed as a percentage, that determines the interest earned on your deposits.
• N indicates how often the interest is compounded within a year. For example, in the case of monthly compounding, N equals 12.
• T denotes the total duration or tenure of the RD, usually measured in years.

How to Calculate the RD interest Rate

M =R[(1+i) n – 1]/1-(1+i) (-1/3)

R= Monthly Instalments

M= maturity value

n= number of quarters

i=rate of interest

Example

Assume you choose to invest ₹2,000 on a monthly basis for 2 years at an annual interest rate of 6%. Here’s a look at the basic breakdown of the deposits and interest over the 24 months:

A is the maturity amount (the final value of the RD after interest).

Pis the monthly deposit (₹2,000).

R is the annual interest rate (6% or 0.06).

N is the number of times the interest is compounded per year (12 for monthly compounding).

T is the tenure in years (2 years).

Monthly Interest Rate = RN=0.0612=0.005

Number of Compounding Periods = N×T=12×2=24N

A=2000 × (1+0.005)24

A=2000 × (1.005)24

A=2000 × 1.12749

A≈2254.98

The total maturity amount for your ₹2,000 monthly recurring deposit over 2 years at an annual interest rate of 6% would be approximately ₹50,864, with each monthly deposit contributing around ₹2,254.98 at the end of the term.

Why Do You Need a Recurring Deposit?

Opening a deposit account might seem basic, but it’s an important step toward building wealth. Here are some reasons why you should take that step:

1. Disciplined Saving

   • Deposit money into your account every month to increase your earnings. Setting this up automatically simplifies the process.
   • Having a limited access account not only reduces the chances of impulsive spending by keeping your funds less accessible, but it also encourages the habit of saving, ultimately contributing to better short-term financial stability.

2. Earn Interest

   • Earning interest helps your money grow and become more valuable over time.
   • Regular deposits can significantly increase your cash’s worth compared to keeping it in a standard savings account.
   • Investing your cash wisely leads to better financial returns in the long run.

3. Financial Goals

   • RDs help you save money by setting a fixed amount to invest regularly for a specific time, which is different from regular saving methods and keeps you focused on your financial goals.
   • You can save for various goals like holidays, new devices, or education with RDs.
   • RDs make it easier to reach your financial dreams by providing a tailored term deposit plan.

4. Low Risk

   • RDs offer a safe way to keep your money, backed by banks.
   • You know exactly how much you will earn when the term ends.
   • Your investment is protected and free from market fluctuations.

How to Open a Recurring Deposit?

It’s easy to open a Recurring Deposit. Just follow these steps:

1. Research various banks for competitive offers.
2. Choose a bank that offers the best rates.
3. Visit the bank in person or use their online platform.
4. Fill out the application form with your details.
5. Specify the amount and duration for your RD.
6. Make your initial deposit to start the RD.

Things to Keep in Mind

Here are some key aspects to keep in mind before you book an RD:

• Taking out your money before the end of the term may lead to a significant loss in expected interest.
• Most banks require a minimum deposit of about ₹500 each month to start the recurring deposit.
• Compare interest rates by visiting different banks’ websites to see the potential returns on your investment.

A Recurring Deposit is a great way to inculcate a regularly saving habit and earn interest on it. It helps you save and achieve your financial goals while being a safe investment. If you want to save money and meet important financial targets, consider a Recurring Deposit. Good luck with your saving efforts!

This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. The Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Article. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from the Bank. The Bank, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.