Saving money regularly is a very sensible habit, and a Recurring Deposit (RD) offers a structured way to do just that. An RD is a special type of savings account offered by banks and other financial institutions. It encourages you to save a fixed amount of money each month over a set period, helping your money grow steadily with interest. This guide will explain everything you need to know about RDs, from how they work to what happens when your savings period ends.
What is a Recurring Deposit (RD)?
A Recurring Deposit, often simply called an RD, is a savings scheme where you deposit a fixed sum of money every month for a specific duration. Think of it like a personal savings challenge where you commit to setting aside money regularly. In return for your regular deposits, your money earns interest, which is added to your savings. This helps your total savings grow over time.
How Your RD Account Works
When you open an RD account, you decide two main things:
- The amount you will save each month: This is a fixed sum, for example, £500.
- The period you will save for: This is called the ‘tenure’, and it could be anything from six months to ten years.
Once set up, you simply make your agreed monthly deposit. Your bank or financial institution will then pay you a fixed rate of interest on your total savings. This interest is usually calculated and added to your account every three months. At the end of the chosen period, your RD ‘matures’, and you receive the total amount you have saved plus all the interest you have earned.
Why an RD is a Smart Way to Save
Choosing an RD account can be a very smart move for several reasons:
- Disciplined Saving: It helps you build a regular saving habit without much effort. Once you set it up, the monthly payments keep you on track.
- Guaranteed Returns: Unlike some other investments, an RD offers a fixed interest rate. This means you know exactly how much interest you will earn, giving you predictable returns.
- Low Risk: RDs are generally considered a very safe way to save your money, as they are offered by regulated financial institutions.
- Compounding Interest: The interest you earn also starts earning interest, which is known as compounding. This helps your money grow faster over time.
- Achieve Financial Goals: Whether you are saving for a holiday, a new gadget, or a bigger future goal, an RD provides a clear path to accumulate the necessary funds.
Who Can Open an RD Account? (Eligibility)
Most people can open a Recurring Deposit account. The rules are generally straightforward and designed to be inclusive.
Age Rules for Individuals
- Adults: If you are 18 years old or older, you can open an RD account in your own name. You will need to provide identification and address proof, just like opening any other bank account.
- Minors: Children under the age of 18 can also have an RD account. However, this must be opened and operated by their parent or a legal guardian on their behalf.
Opening an RD for Children
When an RD is opened for a child, the account is usually in the child’s name, but the parent or guardian is responsible for managing it until the child becomes an adult. This is a great way for parents to start teaching children about saving and to build a fund for their future needs, such as education.
Joint RD Accounts with Others
You can also open an RD account jointly with one or more other people. This means two or more individuals share the account. For example, a husband and wife might open a joint RD to save together for a family goal. All account holders will have access to the account, subject to the terms agreed upon when opening it.
Key Rules for Your RD Account
Understanding the main rules of your RD account will help you manage your savings effectively and avoid any surprises.
How Much You Can Deposit
- Minimum Amount: You can usually start an RD with a very small monthly deposit, often as low as £100. This makes it accessible for almost everyone.
- Maximum Amount: While there is typically no upper limit set by regulators for the maximum amount you can deposit, individual banks might have their own limits.
- Fixed Monthly Payments: The most important rule is that you must deposit the same fixed amount every month throughout your chosen tenure.
How Long You Can Save (Tenure)
The tenure is the period for which you choose to save.
- Minimum Tenure: The shortest period for an RD is usually six months.
- Maximum Tenure: You can save for up to ten years with an RD.
- Flexible Options: Most financial institutions offer tenures in multiples of three months (e.g., 6 months, 9 months, 12 months, 15 months, and so on). You choose the period that best suits your savings goal.
Understanding Your Interest Rate
The interest rate on your RD is fixed when you open the account and remains the same for the entire tenure.
- Varying Rates: Interest rates can differ between different banks and financial institutions. They also often depend on the tenure you choose; longer tenures might sometimes offer slightly higher rates.
- Compounded Interest: The interest on your RD is usually compounded quarterly. This means that every three months, the interest earned is added to your principal, and then the next quarter’s interest is calculated on this new, larger sum.
What Happens if You Miss a Payment
It is important to make your monthly deposits on time.
- Penalties: If you miss a monthly payment, the bank may charge a small penalty fee.
- Account Closure: If you miss several consecutive payments, the bank might have the right to close your RD account prematurely. If this happens, you would typically receive your deposited amount and the interest earned up to that point, minus any penalties.
Understanding RD Withdrawal Penalties
While an RD is designed for you to save until maturity, sometimes you might need to access your money earlier. It is important to know the rules regarding early withdrawals.
What is Early Withdrawal?
Early withdrawal means taking out your money from your RD account before its agreed maturity date. For example, if you opened an RD for two years but decide to close it after one year, that would be an early withdrawal.
Penalties for Taking Money Out Early
If you decide to withdraw your money before the RD matures, you will usually face a penalty.
- Reduced Interest: The most common penalty is that the interest rate applied to your savings will be reduced. Often, it might be lowered to the rate applicable to a standard savings account for the period your money was held.
- Penalty Charge: Some institutions might also levy a small penalty charge on the interest earned.
It is always a good idea to check the specific early withdrawal terms with your financial institution before opening an RD, so you are fully aware of the consequences.
When You Can Withdraw Without Penalty
Generally, you can only withdraw your full accumulated amount, including all the promised interest, without any penalty when your RD account reaches its maturity date. This is because the RD is designed as a commitment to save for a specific period. In very rare circumstances, such as the death of the account holder, the nominee or legal heir might be able to withdraw the funds without penalty, but this depends on the specific bank’s policy.
Your RD Account at Maturity
The maturity date is the exciting moment when your savings journey with your RD comes to an end. This is when you receive the full benefit of your disciplined saving.
What Happens When Your RD Finishes
When your Recurring Deposit account matures, the financial institution will calculate the total amount you have deposited over the tenure, plus all the interest that has accumulated. This total sum is then paid out to you.
- Automatic Credit: Often, the maturity amount is automatically credited to a linked savings account you hold with the same institution.
- Payment Options: You might also have the option to receive the funds via a cheque or other payment methods, depending on your bank’s procedures.
Your Options After Maturity
Once your RD matures and you receive your funds, you have several choices for what to do next:
- Withdraw the Money: You can simply withdraw the entire amount and use it for your planned purpose, whether it is for a purchase, a holiday, or another financial goal.
- Reinvest in a New RD: If you wish to continue your disciplined saving habit, you can open a new Recurring Deposit account. You can choose a new monthly deposit amount and tenure based on your current financial situation and future goals.
- Reinvest in a Fixed Deposit: You might also consider investing the lump sum into a Fixed Deposit (FD). An FD allows you to deposit a single large amount for a fixed period and earn interest, which can sometimes be higher than an RD, especially for larger sums.
An RD is a fantastic tool for building a savings habit and seeing your money grow steadily. By understanding these basics, you can make informed decisions about your financial future.
Author
