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What is a recurring deposit?
You work very hard and save money for your family. You are a conservative investor. You invest your money in a fixed deposit and get interest on the principal (money) you deposit with them.Whenever you get a lump sum (say a bonus from your Company) your money goes into fixed deposits.
There is another product which gives the fixed deposit stiff competition. It is called the recurring deposit.
So what is a recurring deposit?
A recurring deposit is like an SIP in a mutual fund. You don’t get a lump sum (bonus) from your Company that often.In a recurring deposit you can deposit small sums of money each month and get the same rate of interest as a fixed deposit on the money invested.
You have to open a savings bank account and a stipulated amount (a fixed amount of money as specified by you) is deducted each month from this account.
This money is transferred to the recurring deposit account you have with the bank.
It is compulsory to open a saving bank account and maintain a minimum balance of INR 5,000-10,000 in this account as money to your recurring deposit is transferred from here.
A recurring deposit at a bank can be opened with an amount as less as INR 100 a month .Some private banks require you to make a recurring deposit of at least INR 500 a month.
You get the same rate of interest on your recurring deposit as a fixed deposit. The major benefit is you can easily deposit small sums of money into your recurring deposit and build your savings.
What about the tenure of the recurring deposit?
The tenure of a recurring deposit is a maximum of 10 years. It would be a good idea to invest your money in a recurring deposit which matches your financial goals.
If your son is doing his MBA in 3 years time, then it would be wise to open a recurring deposit with a term (tenure) of 3 years.(matures in 3 years)At the end of 3 years you get a lump sum (principal) basically all the money you have invested + interest earned on the money you have deposited.
Once you decide on the tenure of the recurring deposit (say 3 years or 5 years) it is fixed. The minimum time period of a recurring deposit is generally 6-12 months.
What is the rate of interest you get on your recurring deposit?
Many recurring deposits pay an interest rate of 8.5-8.7% a year similar to a fixed deposit.This interest rate can go as high as 9-9.2% a year for a recurring deposit if you make a deposit of 1-5 years.
Higher the term of the recurring deposit higher is the interest paid to you.
Senior citizens may get an additional 0.5% interest on their recurring deposits.
Can you make a premature withdrawal from your recurring deposit?
Many banks do not pay you any interest if you withdraw your money within 1-3 months of making the recurring deposit.Many banks pay you only a savings bank rate (4%) on the money you deposit in your recurring deposit if you discontinue your recurring deposit within 3-12 months. It is between 3-6 months in some banks.
If you miss your installments (do not contribute to the recurring deposit) for say 2-4 months then the bank closes (discontinues) your recurring deposit.You can revive your deposit by paying the balance due (outstanding money) on your account within a month of the last default.
The bank pays you interest as deemed by the banks premature withdrawal policy.
Benefits of a recurring deposit:
You can get a loan up to 80-90% of the money you have in your recurring deposit. (loan against recurring deposit).The loan is a secured loan (secured with collateral) which is your recurring deposit. The rate of interest charged on the recurring deposit will be less than a personal loan (unsecured loan).
A personal loan charges you between 14-22% rate of interest a year.A recurring deposit is a slow and steady approach to build your wealth.
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