As with fitness, in investing too, consistent small steps over time can make a big difference. So if you find setting aside large sums for investment tough, recurring deposits (RDs) offered by banks can be a good alternative.
This is especially so for conservative investors in the lower income tax brackets. Interest income from bank RDs, as from fixed deposits (FDs), is taxed at an individual’s income tax slab rate.
What’s on offer
A regular bank RD enables you to deposit a fixed sum of money every month over the chosen tenure of the deposit. Banks usually offer the same rate on their RDs as on their FDs of equal tenure. But your overall return is higher in an FD as you deposit the entire amount in one go.
You can start a regular RD with a fixed monthly deposit of as low as ₹100 or ₹500, and in multiples thereof (up to a total amount of under ₹2 crore). The monthly instalment is fixed at the time of opening the RD account and cannot be changed later. You can set an ECS (electronic clearing system) mandate for an automatic debit from your bank account.
Note that any delayed monthly instalments attract penalty. Few consecutive months of skipped instalments can also result in the RD account being closed. Premature closure of an RD by a customer is also penalised.
Some banks also offer flexi RDs, which as the name suggests, come with a few flexibilities compared to the regular RDs. Flexi RDs give you the flexibility to make multiple deposits several times each month if you so wish. Though, in many cases there is an overall upper limit. For instance, you can deposit up to ₹50,000 per financial year and up to ₹10,000 per month, respectively in SBI’s and Bank of Baroda’s flexi deposits.
In many, though not all cases, customers are not even penalised for skipping any monthly deposit instalment of a flexi RD.
While this feature offers relief when you are short of money, it also fails to enforce disciplined investing. On this count, regular RDs score over flexi ones. Most banks offer the same rate of interest rate on their regular and flexi deposits.
What to pick
Investors can consider the one-year regular RD from Equitas Small Finance Bank (SFB) which offers 6.35 per cent per annum. Senior citizens get an additional 0.50 per cent. Given the current low interest rates, investors are better off not locking into longer-tenure deposits.
The rate offered by Equitas SFB is higher than the 4.9 – 5.4 per cent and 4.9 – 5.75 per cent offered by many public and private sector banks, respectively on their one-to-two-year RDs. A few private sector banks such as RBL Bank and DCB Bank too offer attractive rates but Equitas SFB Bank fares better than these banks on metrics such as CRAR (capital to risk weighted assets ratio), gross NPA (non-performing assets) and net interest margin.
You can open an RD account with Equitas SFB starting with a minimum deposit of only ₹100. While the bank imposes no penalty for missing the monthly fixed instalment, three such instances will result in closure of the account. Pre-mature closure of the RD by the customer attracts a 1 per cent penalty.
Equitas SFB, which commenced operations as a small finance bank in September 2016, has a diversified loan portfolio with secured loans comprising 81 per cent of this. As of March 2021, the bank’s gross NPAs were at 3.59 per cent, down from 4.16 per cent (proforma) in the preceding quarter. The bank’s higher-than-mandated CRAR of 24.18 per cent too offers comfort.