Saving money can be difficult but it does not have to be. Allow your money to make money while you sit back and reap its benefits. That is the power that solid investments hold. Once you start making money regularly, it is smart to explore different investment avenues. Two of those are fixed and recurring deposits. They are both financially healthy options that primarily serve the same purpose - growing your money. The features of both are, however, different. Let us look at the features, benefits and drawbacks of both, so you can make a calculated choice of investment.

Fixed Deposits:

A conservative avenue of investment offered by banks, fixed deposits offer guaranteed returns on investment. You can deposit a lump sum of money on which you gain a higher rate of interest than you would in a savings account.

Features:

• One-time deposit: You can deposit your choice of amount (minimum amount may vary with each bank) only one time for a fixed period. If you would like to deposit more, you will need to open another fixed deposit account.
• Liquidity: The liquidity offered by fixed deposits is lesser but the higher your deposit amount, the higher is your rate of interest and greater is the maturity amount.
• Tenure: This varies anywhere from 7 days to 10 years but may differ with each bank.
• Income is taxable: Income earned by a fixed deposit is taxable as per the Income Tax Act 1961. The interest earned from this deposit scheme is added to your total annual income and taxed at your personal income tax rate. If you fall under the 30% tax slab, then you will be taxed at the same rate on your fixed deposit as well. However, no tax is deducted if your total interest income is less than ₹40,000 a year. It is advised that you review the tax regulations with your bank, in accordance with the tax bracket that you fall under, before investing in either of these avenues.

Benefits:

• You are assured of returns on fixed deposits.
• This is a no-risk investment with no loss of principal amount.
• You can choose periodic interest payouts (may vary with each bank) to aid you in your monthly expenses.
• This account may serve as an emergency fund or even aid in a liability crunch when needed.
• You can reap the benefits from higher interest rates offered by company fixed deposits.
• Senior citizens are also offered greater returns by some financiers.
• The maturity amount received is higher than the principal amount invested.
• Holding a fixed deposit account encourages you to save while also providing a regular earning potential.

Drawbacks:

• Investing in a fixed deposit account offers low risk, which means low returns, compared to other investment options.
• Withdrawals before the agreed duration may subject you to penalization.
• There are no tax benefits in this investment. However, for senior citizens, interest earned up to ₹50,000 in a financial year is tax-free.
• As a lump sum investment is required, this may not be the best investment option for those that prefer investing smaller amounts regularly.
• Fixed deposits offer poor protection against inflation. This suggests that if the inflation rate is higher than the interest rate, you will gain no real returns.

Recurring Deposits:

A financial instrument offered by banks; recurring deposits are another avenue of investment with low to no risk. An RD account holder is required to make regular payments of a predetermined amount chosen by them.

Features:

• Periodic deposits: Recurring deposits are apt for those who prefer investing smaller sums of money, regularly.
• Liquidity: Premature and mid-term withdrawals are not allowed. The bank may permit premature closing of the account. However, they might charge you a penalty for the same.
• Tenure: This varies anywhere from 6-12 months to 10 years but may differ with each bank. If you choose to invest ₹1000 monthly for a tenure of 12 months, you will receive ₹12,000 plus interest at maturity.
• Income is taxable: This feature is the same as that of a fixed deposit as discussed above.
• Minimum amount: You can invest with a minimum amount of ₹500, although this may vary from one bank to another.

Benefits:

• This is a simple, low to zero risk investment that offers assured returns.
• It is financially easier on the pocket to invest smaller sums of money regularly than a lump sum all at once.
• A flexible recurring deposit scheme enables you to invest any amount that is greater than the minimum amount, at any interval of time.
• The setting up and documentation of this account is simple and hassle-free.
• This scheme is appropriate for short term financial goals.
• The maturity amount received is higher than the principal amount invested.
• Recurring deposit accounts encourage its users to inculcate the habit of regular saving.

Drawbacks:

• In a recurring deposit, you cannot withdraw any part of the money invested by you until the end of its predetermined tenure.
• Unless you have opted for a flexible recurring deposit, you cannot change the periodic deposit amount until the end of its tenure, regardless of your financial situation at the time.
• The returns gained here are lower than that of other avenues due to the low-risk profile offered by recurring deposits.

In conclusion, we have discussed what fixed and recurring deposits are, along with the features, benefits, and limitations of both. The right investment for you boils down to your monthly income, financial plan and risk appetite. Optimizing both these avenues of investment can bear you the sweet fruit of success.