Long Term Recurring Deposit

An effective portfolio is always balanced and creates a mix of market-linked and fixed-income instruments. Market-linked instruments such as equities offer the potential of higher returns but come with a high associated risk. On the other hand, fixed-income instruments such as fixed deposits offer steady and guaranteed returns and come with negligible risk. However, when it comes to investing in fixed-income instruments such as FDs, investors have to invest a high capital amount to earn good returns. This makes it difficult for investors who do not have a high capital amount to earn a steady income through a fixed-income instrument. This is where a long-term recurring deposit comes in to help investors invest systematically in a savings scheme at regular intervals and earn through constant interest payments.

If you want to invest in a fixed-income instrument to earn regular interest but do not have a high capital amount for initial investment, you can look towards investing in a long-term RD. This blog will help you understand everything about a long-term recurring deposit and how it can help you invest systematically and earn good returns over time.

• Long-term recurring deposits (RDs) are savings plans that require fixed monthly deposits over 5 to 10 years. They offer guaranteed returns with compounded interest.
• A recurring deposit's systematic investment feature involves regular monthly deposits, ensuring disciplined and consistent savings.
• Long-term recurring deposits typically offer higher interest rates compared to short-term deposits.
• Long-term RDs have a low minimum investment requirement, making them ideal for investors who do not want to invest a lump sum amount needed in other fixed-income instruments such as traditional fixed deposits.

A long-term recurring deposit is a type of savings plan where individuals deposit a fixed amount of money at regular intervals for a predetermined period. Unlike a traditional FD, where investors have to invest a lump sum amount, a long-term RD helps investors invest a small amount at regular intervals. While investing in a long-term recurring deposit, you need to choose the specific amount you want to invest every month, which generally remains constant throughout the tenure of the RD.

Every long-term RD has a different interest rate based on its tenure. The interest rates are fixed when the RD account is opened and remain fixed for the entire duration. They are generally similar to fixed deposit (FD) interest rates offered by the bank or post office. Interest is compounded quarterly, which helps to grow savings effectively over the long term.

Banks generally discourage premature withdrawals from long-term RDs, as they can negatively affect the compounding effect and drastically lower overall returns. Hence, they charge a penalty for premature withdrawal from a long-term recurring deposit if the RD is closed before the maturity period. The penalty levied by banks can be in the form of a nominal charge or a reduced interest.

Here are some benefits of long-term recurring deposits:

• Guaranteed returns: Long-term RDs offer a fixed interest rate that is agreed upon when opening the account, providing investors with a guaranteed return.
• Risk-free: As a low-risk investment, long-term RDs ensure the safety of your principal amount, making it an attractive option for conservative investors.
• Systematic investments: Investors can invest a fixed amount every month in their RD account, helping in disciplined and systematic investments over time.
• Quarterly compounding: Interest on RDs is compounded quarterly. This means that interest is calculated on both the initial principal and the already-added interest, leading to higher returns over time.
• Tenure options: Long-term RDs offer flexible tenures, ranging from 5 to 10 years. This allows you to choose a duration that aligns with your long-term financial goals.

The tenure for long-term RDs usually ranges between 5 to 10 years, although some banks might offer flexibility within this range. The longer the tenure, the more interest you earn on your deposits. Furthermore, the minimum amount may also vary based on the tenure and the type of long-term RD.

Eligibility criteria for long-term RD are the basic conditions that an applicant must meet for the bank to approve the RD account opening form. In case you fail any of the conditions set under the eligibility criteria for the long-term recurring deposit, it is a possibility that the bank may reject your application. Here are the eligibility criteria for long-term recurring deposits:

• Age: You must be over 18 to open a long-term RD account. However, some banks may also allow minors to open one with the help of parents or legal guardians.
• Minimum deposit amount: Once you have opened the long-term RD account, you must deposit a minimum monthly amount in the RD account. The minimum deposit amount usually starts from Rs. 100, but some banks offer investment amounts as low as Rs. 10.
• Tenure: Long-term recurring deposits have a tenure that starts at 5 years and may go above 10 years. This means that you have to deposit the set amount every month until the maturity of the long-term RD. Failure may lead to penalties and a decrease in your credit score.

Here are the documents required for opening a long-term RD account:

• Proof of identity (POI): An Aadhaar card, voter ID card, passport or driver’s licence.
• Proof of address (POA): Electricity, phone or water bill, rental agreement or bank statement.
• Passport-size photographs: Some banks may ask for multiple passport-size photographs.
• Form 16: This is for salaried employees, for whom banks may ask for high-value RD.

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