A recurring deposit (RD) is a type of savings account offered by banks and other financial institutions in which a person deposits a fixed amount of money at regular intervals (typically monthly) for a fixed period of time. The depositor earns interest on the amount deposited, and the interest rate is usually higher than that of a regular savings account. At the end of the term of the deposit, the depositor receives the original principal as well as the accumulated interest.
RDs are a good option for people who want to save money on a regular basis but may not have a lump sum to deposit in a fixed deposit account. They can also be useful for people who want to save money for a specific goal, such as a down payment on a house or a child’s education.
The frequency of depositing the money can be monthly, quarterly, semi-annual, or annual depending on the bank. The deposit is usually locked for a minimum tenure which can be 6 months to 10 years, the interest rate is usually higher than the savings account.
Please keep in mind that depending on jurisdiction there can be taxes and penalties for premature withdrawal of recurring deposits.
What is the benefit of a recurring deposit?
Recurring deposits (RDs) offer several benefits to depositors, including:
- Higher Interest Rates: RDs typically offer higher interest rates than regular savings accounts, which means that depositors can earn more on their money over time.
- Regular Savings: RDs are a great way to save money on a regular basis, as the depositor must make a fixed deposit at regular intervals. This can help individuals to develop savings habits and build a nest egg for the future.
- Flexibility: RDs offer flexibility in terms of the amount that can be deposited and the frequency of deposits. Some banks even allow depositors to change the amount or frequency of their deposits during the term of the RD.
- Fixed Tenure: RDs have a fixed tenure, so depositors know exactly when they will receive their money back. This can help them plan for future expenses.
- Safe: Recurring deposit is considered a safe investment as it is offered by banks and all deposits up to a certain limit are insured by the government.
- Tax Benefits: In some jurisdictions, interest earned on RD may be eligible for tax benefits under certain sections of the Income Tax Act.
- Liquidity: Some banks offer the option of withdrawing funds prematurely but with a penalty, giving flexibility and liquidity to the depositor in case of an emergency.
Recurring Deposits are generally recommended for people who have regular income and looking for a safe investment option with moderate returns. It’s a good option for people who want to save money for a specific goal, such as a down payment on a house or a child’s education.
What are the types of recurring deposits?
Recurring deposits (RDs) come in different types, depending on the bank or financial institution offering them. Some of the most common types of recurring deposits are:
- Regular Recurring Deposit: This is the most basic type of RD, in which a depositor makes regular deposits for a fixed period of time. The interest rate on this type of RD is usually higher than that of a regular savings account.
- Short-term Recurring Deposit: As the name suggests, a short-term RD is one in which the deposits are made for a shorter period of time, typically between 6 and 12 months. The interest rate on this type of RD is usually higher than that of a regular RD.
- Flexi Recurring Deposit: This type of RD is characterized by the flexibility of depositing and withdrawing funds. Flexi RD allows the depositor to deposit funds as and when they have surplus money, and also withdraw when they have requirements. The interest rate on this kind of deposit is usually lower than a fixed deposit, as banks are giving you the flexibility to withdraw money.
- Special Recurring Deposit: This is a type of RD that is specially designed for senior citizens. The interest rate on this type of RD is usually higher than that of a regular RD, and there may be other benefits as well, such as a waiver of the minimum deposit amount.
- Auto-renewal Recurring Deposit: This type of RD automatically renews itself at the end of the fixed deposit term, provided the depositor does not withdraw the funds. This makes it easy for the depositor to continue to earn interest on their savings without having to actively renew the RD.
- Joint Recurring Deposit: This type of RD is opened jointly in the name of two or more individuals and can be operated by either of them.
Please keep in mind that depending on the region/jurisdiction the offerings of types may vary and the details of each type of RD may also vary from bank to bank. Also, the different banks may have different names for the same type of RD. It’s good to compare the features of different RDs before making a decision.
Which recurring deposit is best?
The best recurring deposit (RD) for you will depend on your individual financial goals and needs. Some factors to consider when choosing an RD include:
- Interest rate: Look for an RD with a high-interest rate, as this will help you earn more on your savings over time. However, it’s important to compare the interest rate with other fixed deposit options available as well.
- Flexibility: If you think you may need access to your funds before the end of the RD term, look for an RD with flexible withdrawal options or a premature withdrawal facility, although this might come with a penalty.
- Tenure: Consider the length of the RD term and choose one that aligns with your savings goals. A short-term RD may be more suitable if you’re saving for a short-term goal, while a long-term RD may be better for a long-term goal.
- Auto-renewal: Look for an RD with an auto-renewal feature if you don’t want to worry about renewing your RD at the end of the term.
- Additional benefits: Some banks offer additional benefits such as a waiver of the minimum deposit amount for senior citizens, special interest rates for women, etc.
- Trust: Choose a bank or financial institution that you trust, and that has a good reputation for providing good customer service and paying deposits on time.
In general, it’s a good idea to shop around and compare different RDs from different banks before making a decision. Also, it’s important to read the terms and conditions of the RD carefully before investing, to ensure that you understand the conditions associated with premature withdrawal if any, and other details that can affect your investment.
What is the recurring deposit formula?
The formula for calculating the maturity value of a recurring deposit (RD) is as follows:
Maturity Value = Principal * (1 + (Interest Rate/Frequency of Compounding))^(Number of Compounding Periods)
- The principal is the total amount deposited in the RD
- Interest Rate is the annual interest rate offered on the RD
- Frequency of Compounding is the number of times the interest is compounded per year (e.g., monthly, quarterly, annually)
- The number of Compounding Periods is the number of times the interest is compounded over the term of the RD
It’s important to note that the maturity value is calculated assuming that the depositor continues to make regular deposits until the end of the term of the RD and that no withdrawals are made. In the case that the depositor wishes to make a partial or complete withdrawal the maturity value will be adjusted accordingly.
Here’s an example: Let’s say you invest in an RD with a principal of NPR 10,000 for a term of 3 years, with an annual interest rate of 8%, compounded monthly. The number of compounding periods would be 36 months (3 years x 12 months per year) the maturity value using the above formula would be: Maturity Value = 10000 * (1 + (8/12))^(36) = 12,958.27
Please keep in mind that this is a simple example and Interest rate and compounding frequency can vary for different banks and for different plans, so it’s important to check with the bank for the specific details of your RD and to use their calculator if they have one.
Is a recurring deposit a good investment?
Recurring deposits (RDs) can be a good investment option for certain people, depending on their financial goals and needs. Here are some reasons why an RD might be a good investment:
- Regular savings: RDs can be a useful approach to saving money consistently since the depositor is required to make a fixed deposit on a regular basis. As a result, people can form saving habits.
- Higher Interest Rates: RDs often provide greater interest rates than standard savings accounts, allowing savers to accumulate a larger profit over time.
- Safety: Recurring deposits are seen as secure investments since banks provide them and the government insures deposits up to a certain amount.
- Fixed Tenure: Depositors know exactly when they will get their money back because RDs have a defined term. They can use this to budget for upcoming costs.
- Tax Benefits: Interest generated on RD may qualify for tax deductions under specific jurisdictions.
On the other hand, RDs may not be suitable for everyone, here are a few reasons why:
- Low returns: The interest rate on RDs tend to be lower as compared to other fixed deposit options, so it may not be the best option for people who want to earn the highest possible returns on their savings.
- Lack of liquidity: Some banks may impose penalties for premature withdrawal, so depositors may not be able to access their funds as easily as they would with other types of savings accounts.
- Low Flexibility: Some RDs require depositors to make regular, fixed deposits, and may not allow for variations in the deposit amount or frequency.
In general, RDs are considered to be a low-risk, moderate-return investment option and it’s good to review your investment options and speak with a financial advisor before making a decision. Also, it’s important to review the terms and conditions of the RD carefully before investing, to ensure that you understand the conditions associated with premature withdrawal if any, and other details that can affect your investment.
Can I withdraw RD anytime?
The ability to withdraw funds from a recurring deposit (RD) account before the end of the term will vary depending on the bank or financial institution offering the RD. Some banks may allow premature withdrawals, while others may not. Some banks may allow partial withdrawals, while others may not.
Banks usually have penalties on premature withdrawal, meaning that if you withdraw the funds before the end of the term, you may be charged a fee or you may receive a lower interest rate on your deposits. These penalties may vary depending on the bank and the length of the deposit term.
It’s always a good idea to read the terms and conditions of the RD carefully before investing, to ensure that you understand the conditions associated with premature withdrawal if any, and other details that can affect your investment. It’s also a good idea to speak with a representative of the bank or financial institution offering the RD to ask about the specifics of premature withdrawals.
It’s also worth noting that if you plan on using the recurring deposit for a specific goal like a down payment on a house, then it’s best to not withdraw it prematurely as it will affect the interest earned and the maturity amount, in turn affecting the goal you had in mind.
Which bank has a recurring deposit in Nepal?
Most of the commercial banks in Nepal offer recurring deposits as a financial product. Some of the top commercial banks in Nepal offering recurring deposits are:
- Nabil Bank Limited
- Nepal Bank
- NIC ASIA Bank
- Global IME Bank
- NMB Bank
- Himalayan Bank
- Siddhartha Bank
- Prabhu Bank
- Nepal Investment Bank
- Kumari Bank
- Agriculture Development Bank
- Everest Bank
- Sanima Bank
These are only a few examples of commercial banks in Nepal. Before making a decision, it’s usually a good idea to research and evaluate the services, interest rates, and fees provided by various banks. Please keep in mind that this is not a ranking, and there may be various opinions on the top banks in Nepal.