Term Deposits are one of the best investment options for people who are looking for a stable and safe return on their investments. In Term Deposits, the sum of money is kept for a fixed maturity and the depositor is not allowed to withdraw this sum till the end of the maturity period. That is why they are called as Term Deposits because they are kept up to a particular term. But when it comes to Term Deposit, here’s what you need to know.
There are two types of Term Deposits:
- Recurring Deposits
- Fixed Deposits
Recurring Deposit:
In aRecurring Deposit, a fixed sum of money is invested at a fixed interval. In most cases, this interval is once a month. The investments earn interest on them till the maturity period. To put it simply, a Recurring Deposit is like opening several different Fixed Deposits, each with the same maturity period.
Once the sum of money and the tenure of the Recurring Deposit is fixed, it cannot be changed. Premature withdrawal is possible, but there will be a penalty in the rate of interest that is given by the bank. The minimum Recurring Deposit amount is Rs. 1,000 and can be increased in multiples of Rs. 100. The minimum period of investment for a Recurring Deposit is 6 months and the maximum period is 10 years. The rate of interests on Recurring Deposit ranges between 7% to 9%.
Some banks provide an option to convert a Recurring Deposit to a Fixed Deposit on the maturity.
Fixed Deposit:
Fixed Depositsare deposits where a particular sum of money is invested for a fixed duration. The duration of Fixed Deposits is flexible. It can range from 7 days to 10 years. The rate of interest for the Fixed Deposit depends on the period for which the funds are locked in.
Just like a Recurring Deposit, a Fixed Deposit amount cannot be withdrawn until the maturity period. Premature withdrawal is allowed after the bank charges a penalty in the rate of interest. The minimum amount of investment for a Fixed Deposit is Rs. 5,000. The rate of interest on the Fixed Deposit ranges from 4% to 7.5%. You can also calculate your rate of interest using theFD calculator.
Some banks provide the option of a sweep out facility where the amount above a particular balance in a Savings Account is automatically converted to a Fixed Deposit. This helps the Savings Account earn more interest.
Term Deposit vs Fixed Deposit:
A Fixed Deposit is kept for a longer period and hence it earns a higher rate of interest. A Recurring Deposit takes a defined sum and invests it every defined period. This means each instalment earns interest for a lesser period than the previous instalment. The interest on a Fixed Deposit for the same maturity is more than that on a Recurring Deposit.
However, a Recurring Deposit is a convenient way of investment for people who have a fixed investment amount per month. As such, the investment type depends on the goals and funds available.
How do Term Deposits work for the bank?
A bank’s primary operations are lending and borrowing. To lend money to people in the form of loans such as Personal Loans, Home Loans, Car Loans, etc. a bank needs funds. It gathers these funds in the form of Term Deposits, Savings Accounts and Current Accounts. It pays an interest on the borrowings i.e., on Term Deposits or Savings Deposits and charges interest on loans.
As such, a bank is always in need of funds from depositors, especially in the form of locked-in capital such as a Term Deposit.
Click here to know more aboutRecurring Deposits and Fixed Deposits!
You can create your Fixed Deposit or Recurring Deposit Asset through an HDFC Bank Savings Account. New customers create a FD / RD by opening a new Savings Account, existing HDFC Bank can create their Fixed Deposit / Recurring Deposit by clicking here.
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*Terms and Conditions apply. The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circ*mstances.
I'm a seasoned financial expert with a wealth of experience in investment strategies and banking operations. Over the years, I have closely monitored and analyzed various investment options, including Term Deposits, Recurring Deposits, and Fixed Deposits. My expertise extends to understanding the intricacies of interest rates, maturity periods, and the overall functioning of these financial instruments.
Now, let's delve into the concepts covered in the article:
Term Deposits: Term Deposits are considered one of the best investment options for those seeking stable and safe returns. In a Term Deposit, a specific sum of money is kept aside for a fixed maturity period, and the depositor is not allowed to withdraw it until the end of this period.
Recurring Deposits (RD): Recurring Deposits involve investing a fixed sum of money at regular intervals, typically monthly. The interest is earned on these investments until the maturity period. The deposit amount and tenure are fixed and cannot be changed once set. Premature withdrawal is possible, but it incurs a penalty. The minimum investment for an RD is Rs. 1,000, with a period ranging from 6 months to 10 years. Interest rates on RDs typically range from 7% to 9%.
Fixed Deposits (FD): Fixed Deposits require a specific sum of money to be invested for a flexible duration, ranging from 7 days to 10 years. Similar to RDs, premature withdrawal is subject to a penalty. The minimum investment for an FD is Rs. 5,000, with interest rates varying from 4% to 7.5%. Some banks offer a sweep-out facility, automatically converting excess balance in a Savings Account into a Fixed Deposit.
Term Deposit vs. Fixed Deposit: A Fixed Deposit is kept for a longer period, earning a higher rate of interest compared to a Recurring Deposit. RDs invest a fixed sum at regular intervals, with each installment earning interest for a shorter period than the previous one. The choice between the two depends on individual goals and available funds.
How Term Deposits Work for Banks: Banks rely on funds from depositors for lending operations. Term Deposits, along with Savings and Current Accounts, provide the necessary capital for lending, such as Personal Loans, Home Loans, and Car Loans. Banks pay interest on Term Deposits and charge interest on loans, making them dependent on a steady influx of funds from depositors.
In summary, Term Deposits, including Recurring Deposits and Fixed Deposits, are integral components of a sound investment strategy. The choice between RDs and FDs depends on individual financial goals and preferences. Understanding the functioning of these instruments is crucial for making informed investment decisions.
