Term and recurring deposits are both popular investment avenues for most individuals. To choose the best option for your financial situation it is important to understand both types of investment tools.
In fixed or term deposits, the investors invest a lump sum amount while opening the account. This amount earns interest at a pre-determined rate, at the time of account opening. At the end of the term, investors receive the principal and interest, which is also pre-determined.
On the other hand, when you choose recurring accounts, you will invest a certain sum at periodic intervals. This is a kind of deposit where interest is calculated at a compounding rate, which varies from one institution to another. At the end of the period, investors receive the total amount, along with interest.
Differences Between the 2 Kinds of Deposits
- Features
Term deposit and recurring deposit are both fixed income products offered by the banks and other financial institutions. Investors receive a fixed return, which can either be on maturity or at specific frequencies. Although interest rates are subject to changes, both these deposits offer the same rate irrespective of any modifications.
- Benefits
Fixed deposits are beneficial for investors who want to earn higher returns on surplus investible amounts available with them. Alternatively, with a recurring account, individuals can inculcate a regular saving habit.
- Interest rates
Although institutions may offer the same rate on the term and recurring accounts, term deposit interest rates yield higher returns. This is because the entire amount invested in fixed deposit accounts earns compounded interest until the maturity date. However, only the first investment made in the recurring account earns compounded interest, while other investments earn proportionate effect, which reduces the returns through recurring deposit interest rates.
- Time period
The time period between the 2 kinds of fixed deposit accounts differs from one bank to the other. The recurring accounts are often opened for a minimum period of one year, while term accounts can be opened for even as little as 7 days.
- When to invest
Investors who do not have a lump sum investible surplus can opt for a recurring account. This will give you a regular saving habit, which helps your financial goals in the medium term. However, if you have an investible surplus, it would be better to apply for term account.
- Advantages
A term account can help to earn higher returns on investments made for a specific period of time. On the other hand, recurring accounts are beneficial to help investors to save regularly. They are also beneficial in ensuring the amount invested cannot be withdrawn until maturity. This helps to better protect your finances for the long term.
To understand the above points, look closely at the table below:
| Fixed Deposit | Recurring Deposit | |
| Principal | 24,000 | 2,000 per month |
| Interest | 9% per annum compounded quarterly | |
| Annual Interest | 2,234 | 1,195 |
| Maturity Amount | 26,234 | 25,195 |
The fixed deposit earns INR 1,039 more during the same period because of the compounding effect discussed above. However, if you do not have INR 24,000 to invest at a time, it would be advisable to opt for the second option.
Almost all the leading nationalized and private banks in India, such as Kotak Bank & others provide both kinds of deposit accounts. For more information, you can visit the official website.
