Recurring Deposits.

Recurring Deposits - Money Matters.

Recurring Deposit (RD) is a simple method for saving. Its purpose is to build up funds over a period of time. It is a gradual process. Money has to be deposited every month to grow it over a period of time. RD demands strict discipline and planning. Recurring deposits are useful for everybody.

What is a Recurring Deposit?

A Recurring Deposit is a monthly deposit scheme run by banks and financial institutions. The deposit is recurring, i.e., the same amount of money has to be deposited repeatedly every month till the end of the tenure. RD can be opened with less money. You can start RD with just Rupees One Hundred. Private banks may have a higher limit for RD (Rs. 500 to Rs. 1000), but most public sector banks have more pocket friendly RD for people.

Advantages of Recurring Deposits.

Recurring deposits have many advantages.

(1) As mentioned earlier, recurring deposits are monthly deposits which can be opened with less money, and so anybody can save money by opening an RD account in a bank or in an NBFC. It has an edge over other types of deposits in this respect. The interest on RD may not be encouraging, yet it is a sure way to build funds for higher investments.

(2) RD is recommended if you have an insurance policy. Insurance policies have flexible modes for paying premiums. Most policies have options of monthly, quarterly, semi-annually and annually modes to select for paying premiums. An RD can be useful for semi-annual and annual modes of premiums as they can build funds for it.

(3) RD is helpful for annuity policy holders who receive money on monthly basis. A recurring deposit with a standing instruction to debit money from the account in which the annuity money gets credited is a good and easy way to build up funds for future.

(4) Most banks provide overdraft against RD. It can be used in emergencies. Overdraft up to 85% to 95% of the deposited amount can be availed. This may help them who need money without liquidating the RD.

Recurring deposits are suitable even for low income individuals, but the income should be regular. RD can be maintained either by depositing money manually in the account or it can be done by giving a standing instruction to the bank to debit the amount from the savings account.

Some Practical Suggestions for RD.

(1) Open RD for short duration. RD for 6 months would be ideal for people who have less regular income. A short duration RD would help to increase savings. A short term RD is more likely to be maintained till maturity than a longer one.

(2) Start RD with a small amount. This suggestion is for them who have limited or less income. Never be in a hurry to reap more benefits quickly. Letting the fund grow slowly has a more desirable effect. Slow, yet consistent growth is needed.

(3) Open a Fixed Deposit with the amount of the matured RD and simultaneously open a new RD, preferably with the same or with a slightly higher amount, if possible. This should be continued every time when the RD matures. By following this method religiously, even poor people can build funds.

(4) Open RD for specific purposes. Example, if you have a life insurance policy with a half-yearly or yearly mode of premium, open an RD specifically for the purpose of building funds for that policy.

(5) Never put all your money in RD. That's not recommended because it can create liquidity problems. It is also a good practice to make multiple RD's with small amount instead of a single one with a big amount.

(6) Overdraft is a facility which helps to get funds without closing the deposit. However, for a recurring deposit with less tenure or with less deposits made, it may not be helpful.

(7) Try not to close the RD prematurely. A prematurely closed RD is not likely to encourage anybody to start a fresh one. That's another mistake which most people make. Should you close the RD prematurely due to an emergency, open another one when you feel comfortable. Select a lesser tenure to avoid premature closure.

(8) Make the best use of RD when it matures. Don't use the money for leisure. Invest it again in savings plans like FD or Life Insurance.

(9) Never under estimate the savings capability of a recurring deposit. People often don't give much importance to RD due to its slow growing characteristics, but that's where they go wrong. RD could be a good investment if undertaken with care and dedication.

Recurring deposits have a specific purpose: to build funds for your needs. They can be used for any purpose. You can open any number of RD's for each of your needs. They grow with time and help in higher investments.

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