FD vs. RD: Choosing the Right Fixed-Income Investment
FD vs. RD: Which Safe Bet is Best for Your Savings?
When it comes to safe, guaranteed-return investments, Fixed Deposits (FDs) and Recurring Deposits (RDs) are the go-to options for millions of Indians. Both are offered by banks and post offices and provide a secure way to grow your money. But they serve different purposes and suit different saving habits. Let’s explore the differences to help you choose the right one.
What is a Fixed Deposit (FD)?
A Fixed Deposit is a financial instrument where you invest a lump sum amount of money for a fixed period at a predetermined interest rate. The interest rate is locked in for the entire tenure, and you receive the principal and accumulated interest at maturity.
Key Features of an FD
- Lump Sum Investment: Requires a one-time investment.
- Guaranteed Returns: The interest rate is fixed, so you know exactly how much you’ll earn.
- Flexible Tenure: Tenures can range from 7 days to 10 years.
- Higher Interest Rates: FDs often offer slightly higher interest rates compared to a regular savings account.
- Loan Facility: You can often take a loan against your FD.
FDs are perfect for investors who have a lump sum of money and want to park it safely for a specific period to earn a fixed return.
See how much you can earn with our FD Calculator.
What is a Recurring Deposit (RD)?
A Recurring Deposit is an investment tool that allows you to deposit a fixed amount of money every month for a predetermined period. Like an FD, it offers a fixed interest rate for the entire tenure.
Key Features of an RD
- Regular Monthly Deposits: Encourages a disciplined saving habit.
- Guaranteed Returns: The interest rate is fixed throughout the tenure.
- Flexible Tenure: Tenures typically range from 6 months to 10 years.
- Accessibility: You can start an RD with a small monthly amount, making it accessible to everyone.
- Goal-Oriented Savings: RDs are excellent for saving towards short-term to medium-term goals, like a vacation or a down payment.
RDs are ideal for salaried individuals and those who want to build a savings corpus through regular, disciplined contributions.
Project your RD growth with our RD Calculator.
FD vs. RD: A Numerical Comparison
The best way to understand the difference is with an example. Let’s say you have ₹1,20,000 to invest for 1 year at an interest rate of 7% per annum.
Scenario 1: You choose a Fixed Deposit (FD)
You invest the entire lump sum of ₹1,20,000 at the beginning of the year.
- Principal: ₹1,20,000
- Interest Rate: 7% p.a. (compounded quarterly)
- Tenure: 1 Year
- Maturity Value: ~₹1,28,623
- Interest Earned: ~₹8,623
With an FD, your entire principal starts earning interest from day one, leading to higher interest income.
Scenario 2: You choose a Recurring Deposit (RD)
You decide to invest ₹10,000 every month for 12 months.
- Monthly Deposit: ₹10,000
- Total Principal Invested: ₹1,20,000
- Interest Rate: 7% p.a. (compounded quarterly)
- Tenure: 1 Year
- Maturity Value: ~₹1,24,589
- Interest Earned: ~₹4,589
With an RD, each monthly installment earns interest for a different duration. The first installment earns interest for the full 12 months, the second for 11 months, and so on. This is why the total interest earned is lower than in an FD for the same total principal amount.
The Takeaway: An FD is better for maximizing returns if you have a lump sum. An RD is a tool for disciplined saving to build that lump sum in the first place.
FD vs. RD: The Key Differences
| Feature | Fixed Deposit (FD) | Recurring Deposit (RD) |
|---|---|---|
| Investment Style | One-time lump sum investment | Regular, fixed monthly investments |
| Best For | Parking a large sum of money (e.g., bonus, inheritance) | Building a savings habit, saving for a specific goal |
| Cash Flow | Requires a single, large outflow | Requires a small, regular outflow |
| Interest Calculation | Compounded on the entire principal from day one | Interest is calculated on each installment separately |
| Flexibility | Less flexible; premature withdrawal has penalties | Similar penalties for premature closure, but installments are manageable |
| Who Should Use It? | Individuals with surplus cash | Salaried individuals and regular savers |
Which One Should You Choose?
The choice between an FD and an RD boils down to your cash flow and savings style.
Choose an FD if: You have a significant amount of money that you don’t need for the near future. For example, if you’ve received a bonus, sold a property, or have matured investments, an FD is a great way to lock in a good interest rate and grow your capital safely.
Choose an RD if: You want to save a specific amount each month from your regular income. It’s a perfect tool to build discipline and save for goals like buying a new gadget, planning a trip, or creating an emergency fund.
Can you have both? Absolutely! Many people use both instruments for different financial goals. They might have an FD for long-term, secure capital growth and an RD for short-term, goal-based savings.
Plan your savings effectively with our calculators:
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