When you compare the investment portfolio of a 30-year-old investor today with that of a 30-year-old investor from three decades earlier, you’ll certainly find many significant differences. One of the key differentiating factors is that millennials today have a greater inclination towards investing in the stock market. Their portfolio is likely to consist of a large proportion of direct equity and mutual funds.

 

On the other hand, back in the day, young people preferred safer investments. Fixed deposits (FDs), recurring deposits (RDs) and real estate were among the most preferred investment avenues. And while real estate continues to remain a hot favourite even today, have FDs and RDs fizzled out of favour with the average investor?

 

Let’s take a closer look at how FDs and RDs fare today, and get a better idea of how they work and what they have to offer.

 

Fixed Deposits and Recurring Deposits Today

Although FDs and RDs may have been partially replaced by riskier investments like equity and cryptocurrency in the investment portfolios of many aggressive investors, data shows us that they continue to remain relevant in India.

 

In the financial year 2019-2020, Indian investors held more than Rs. 46 trillion in bank fixed deposits. By comparison, during the previous financial year, this number was only Rs. 44.18 trillion.[1] This is an indicator of the fact that when a black swan event like the pandemic comes along, or if volatility threatens to erode the capital invested in the markets, India’s retail investors instinctively turn to safer investments like fixed deposits.

 

A Closer Look at Fixed Deposits

Also known as term deposits, fixed deposits are investment instruments where you invest a lump sum amount with a bank or a Non-Banking Financial Institution (NBFC). This investment is made for a fixed duration, known as the investment tenure. Over this period, the bank pays out interest at a specified rate on the amount you have invested.

 

This interest can be reinvested into your FD, or you can choose to have it paid out to you on a monthly or a quarterly basis. The rate of interest is predetermined at the time of making the deposit, and it remains fixed throughout the entire investment tenure. So, FDs are unaffected by market fluctuations and market risks. This makes them ideal investment options for conservative investors whose primary goal is capital preservation.

 

Here are some key features and benefits of FDs in India.

  • FDs offer guaranteed returns on the investment made.
  • The tenure of investment is flexible, and it ranges from as short as 7 days to as long as 10 years.
  • Some banks allow you to avail a loan against your FD to meet any emergency financial needs you may have.
  • The interest earned on your FD is taxable as per your income tax slab.
  • The rate of interest on your FD depends on the tenure of investment and the amount of investment made.

 

A Closer Look at Recurring Deposits

Recurring Deposits, as the name indicates, is a kind of investment plan where you invest a certain amount of money each month over the given investment tenure. At the end of this period, you can withdraw the amount invested, along with the interest earned thereon.

 

So, an RD scheme allows you to save up in a disciplined manner, and earn interest in the process. Here are some key features and benefits of RDs in India.

  • You can start a recurring deposit with as little as Rs. 100.
  • The tenure of your RD can range from 6 months to 10 years.
  • The rate of interest offered on your RD is also predetermined, making the returns immune to market risks.
  • Some banks allow you to open flexible RDs, where you can deposit different amounts each month.

 

RD vs. FD: Which one should you choose?

The primary allure of RDs and FDs is that they offer assured returns. This means you know upfront exactly how much you will be able to earn over the investment tenure. For conservative investors, this degree of certainty makes fixed deposits and recurring deposits a preferred investment option. And for more aggressive investors, FDs and RDs can bring in some much-needed stability to their investment portfolio.

 

So, irrespective of what your risk profile is, you can benefit from investing in an RD and an FD. But which one should you choose? The short answer is that you can choose both. But the finer details can tell you which investment option may be right for your financial situation.

 

Choose an FD if -

  • You have a lump sum amount to invest
  • You can remain invested for the long term
  • You want to preserve your capital and earn some interest in the process
  • You want to set up a source of guaranteed additional/alternate income

 

Choose an RD if -

  • You have a regular source of income and have some surplus funds after all your expenses each month
  • You want to save up small amounts in a disciplined manner
  • You want to earn a guaranteed interest at the end of the investment tenure
  • You want to save up for a near-term goal like a family vacation or a premium purchase

 

Conclusion

The bottom line is that no matter what new investment options may arrive on the scene, recurring deposits and fixed deposits continue to remain relevant. They may appeal more to conservative and moderate investors than aggressive investors, but the fact of the matter is that every investor’s portfolio can benefit from FDs and RDs.

 

So, if you have received a lump sum amount, or if you want to save up diligently without taking on any additional investment risk, a fixed deposit or a recurring deposit can be your go-to investment option. Today, all leading and upcoming banks and NBFCs offer a wide range of deposit accounts to choose from. So, compare your options and choose the instrument that offers the best rates of returns.

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Disclaimer: 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. Bank make no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. 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 Kotak. Kotak, 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.