Recurring Deposits (RD) are one of the most popular saving instruments in India. They offer a disciplined way to save money and earn interest over a fixed tenure. However, can RD help in generating wealth? In this blog, we will explore what RD is, how it differs from Fixed Deposits (FDs), how to open an RD account, and whether it can be a wealth-generation tool.
What is a Recurring Deposit (RD)?
A Recurring Deposit (RD) is a type of term deposit offered by banks and financial institutions. It allows individuals to deposit a fixed amount of money every month for a predetermined period. In return, the bank pays interest on the accumulated amount. At the end of the tenure, the depositor receives the principal amount along with the interest earned.
Key Features of RD:
- Fixed monthly deposits
- Tenure ranging from 6 months to 10 years
- Fixed interest rates offered by banks (varies between 5% to 7% annually)
- Premature withdrawal may attract penalties
How is RD Different from FD?
Both RD and FD are term deposits, but they function differently:
- RD requires monthly installments, whereas FD is a one-time lump sum deposit.
- RD offers slightly lower interest rates compared to FD, where the full amount is deposited upfront.
- RD tenure ranges from 6 months to 10 years, while FD tenure can be as short as 7 days and up to 10 years.
- Both RD and FD can be closed early, but premature withdrawal attracts penalties.
- RD is ideal for regular savers, whereas FD suits those with a lump sum amount to invest.
How to Open an RD?
Opening an RD is simple and can be done through banks, post offices, or online platforms. Here’s how:
- Choose a Bank or Post Office – Compare interest rates offered by different banks and select the best one.
- Select Tenure & Monthly Deposit – Decide how long you want to invest and the amount you can deposit every month.
- Open the RD Account – This can be done online via internet banking or by visiting a bank branch.
- Set Up Auto-Debit – Link your savings account to ensure timely deposits.
- Track and Manage – Monitor your RD maturity value and plan reinvestment accordingly.
Can RD Help in Wealth Generation?
The short answer is NO. RD is a great tool for disciplined savings, but it does not generate wealth. Wealth generation requires higher returns, which RD does not provide. Here’s why:
Comparison of RD vs. Mutual Fund SIP vs. Stock Market
Let’s take an example of someone saving ₹30,000 per month in different investment options over 20 years.
- Recurring Deposit (6% p.a.) – Investing ₹30,000 per month for 20 years results in ₹1.22 crore, but after adjusting for inflation and taxes, real returns are much lower.
- Mutual Fund SIP (12% p.a.) – The same investment in mutual funds can grow to ₹3.22 crore, significantly outperforming RD due to compounding and equity growth.
- Stock Market (15% p.a.) – Long-term investments in stocks may yield around ₹4.72 crore, but they come with higher risk and volatility compared to RD and SIPs.
Adjusting for Inflation & Taxes
Inflation in India averages 6-7% per year. After adjusting for inflation, the real value of RD savings may not be sufficient to meet future expenses.
- RD interest is taxable under Income Tax Slab Rates
- Mutual Funds (Equity) are taxed at 10% on LTCG above ₹1 lakh
- Stock market gains may be taxed as Capital Gains (10-15%)
RD ensures safety but provides low post-tax, post-inflation returns compared to equity-based investments.
Better Alternatives for Wealth Generation
While RD is a secure saving option, wealth generation requires higher return investments. Here are some alternatives:
- Mutual Fund SIPs – Provides market-linked returns (10-15% p.a.)
- Stock Market Investments – Long-term investments in Sensex/Nifty can yield higher returns.
- PPF (Public Provident Fund) – Offers tax-free returns and is good for long-term saving.
- NPS (National Pension Scheme) – Useful for retirement planning with tax benefits.
- Real Estate Investment – Can appreciate significantly over long periods.
Risks Associated with High-Return Investments
- Mutual Funds & Stocks: Market-linked, may be volatile.
- Real Estate: Requires large capital & has liquidity issues.
- PPF/NPS: Long lock-in period.
However, despite the risks, these alternatives beat inflation and generate real wealth over time.
Final Conclusion
RD is an excellent tool for safe and disciplined savings, but it is not meant for wealth generation. If your goal is wealth creation, then consider investing in mutual funds, stocks, or other high-return instruments. RD can help create short-term funds, but to beat inflation and taxes, one must look beyond traditional savings instruments.
For risk-averse investors, combining RD with PPF and debt mutual funds can be a balanced strategy. However, for long-term wealth, equity investments are necessary.
Would you still rely on RD for wealth generation, or would you explore better investment options?
