Fixed Deposit Vs Recurring Deposit

By Ruchi Gohri
  | Published: 02 July 2021 | Last Updated On: 07 July 2021

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The financial institutions in the UAE offer multiple investment options for individuals to encourage savings. People who wish to invest their money must first study the market and choose an investment option that’s based on their financial preferences and long term goals. Most investors prefer choosing fixed deposit or recurring deposit options to invest their money as they keep their funds safe and secure.

Both fixed deposit and recurring deposit offer high returns and attractive benefits. However, there are still some differences that could affect the choice of individual investors. These investment schemes differ in terms of tenure, pay-out frequency, and interest rates. 

In this article, we will help you have a better understanding of these investment options. We’ll address their similarities and differences along with their definition for you to get a better understanding of both these investing options.

What is a Fixed Deposit?

Fixed deposit is a type of investment where a lump sum amount is invested on fixed interest rates. Investors choose a specific tenure for their deposit and opt for a regular pay-out based on their financial preferences. With fixed deposits, the investors have a choice to pick a cumulative or a non-cumulative plan. 

With a cumulative plan, the interest gained on the fixed deposit gets accumulated in the compounding method, which means it can be reinvested with the principal amount. In the cumulative plan, the investors get the total invested amount and accrued interest paid back at the In the cumulative plan, the investors get the total invested amount and accrued interest paid back at the fixed deposit maturity.

On the other hand, with a non-cumulative plan, the investor can invest the principal amount for a fixed tenure and get the interest paid monthly, quarterly, or yearly as chosen when starting the designated deposit account.

The best part about the fixed deposits is that they offer guaranteed returns. Most banking and financial institutions in the UAE offer fixed deposit interest rates between 1 and 4 per cent. The interest rates may vary for different banks and financial organizations. The investors can calculate the interest and maturity amount using an FD calculator. 

Various banking solutions allow investors to withdraw their principal amount prematurely. However, a few of them charge a penalty for the same. The rules for premature withdrawal may also vary from bank to bank. 

The investors can also take a loan against a fixed deposit account to meet their financial requirements. The banks in the UAE offer different types of loans, including property loan, education loans, etc. 

What is a Recurring Deposit?

A recurring deposit is an excellent investment option that offers interest on small deposits. They allow the individuals to save a small fixed amount out of their income every month. Unlike fixed deposits, the investors get the interest paid out with the principal amount at the time of maturity of the tenure. The recurring deposit tenure ranges between six months to ten years in the UAE. 

The interest rates on a recurring deposit vary from bank to bank based on the amount and tenure of the deposit. The recurring deposit interest rate gets compounded on a quarterly basis. In UAE, the recurring deposit interest rates start from 2 per cent for the investors.

An investor can calculate the recurring deposit interest and the maturity amount using the RD calculator. The calculator asks for specific details such as the interest rate, deposit amount, deposit tenure in a month, etc. 

With a recurring deposit, the investors cannot withdraw their investments prematurely. However, they get to take an education or a property loan against their investment. They can also calculate the loan instalment amount using the loan EMI calculator. 

Now that you know what a fixed deposit and a recurring deposit are, let us check out the similarities and differences between them.

Common Benefits of Investing in an FD and RD

Here are the significant benefits of investing in a fixed deposit.

1. Tax Benefits

The investment made in fixed deposits and recurring deposits qualifies for tax exemption under Section 80C of the Income Tax Act, 1961.

2. High-Interest Rates

The interest rates on fixed deposits and recurring deposits are comparatively higher than regular savings accounts. The investors can calculate the earned interest on the FD and RD calculator.

3. Encourage Savings

Both fixed and recurring deposits encourage account holders to increase their savings. They offer a financial discipline through regular investment for a fixed tenure.

4. Safe Investment

The investment in fixed deposits and recurring deposits is safe and offers guaranteed returns in the form of interest.

5. Flexibility

Investors can choose the deposit tenure based on their financial needs. Both fixed deposit and recurring deposit provide the investor with the flexibility of choosing the term.

6. Liquidity

The investors can take a loan against the fixed deposits and recurring deposits. However, they have a fixed tenure but allow them to withdraw their funds anytime.

7. Premature Withdrawals

The investors can make a premature withdrawal from both fixed deposit and recurring deposit. However, in some cases, they need to pay the penalty for the same. 

For example, they can withdraw 25 per cent of the principal amount without paying any penalty. On the other hand, if they need to withdraw more than 25 per cent, let’s say 30 or 40 per cent, they need to pay the penalty as calculated by the bank.

Difference between Fixed Deposit and Recurring Deposit

Here are a list of differences between a fixed deposit and a recurring deposit.

Category Fixed Deposit Recurring Deposit
Tenure 7 days to 10 years 6 months to 10 years
Frequency of Deposit One-time deposit Monthly deposits
Interest Rates Fixed deposit interest rates are comparatively lower than the recurring deposit interest rates. Recurring deposit interest rates are comparatively higher than the fixed deposit interest rates.
Payment Frequency Fixed deposits can be paid out on a yearly, quarterly, or monthly basis and can be considered a regular income. The recurring deposit can only be paid out at the time of maturity. The investors get the lump sum amount at the completion of investment tenure.
Auto-Renewal Fixed deposit can be auto-renewed The recurring deposit cannot be auto-renewed
Default The investors can’t default the fixed deposit account as they make the lump sum payment at the beginning of the tenure. If the investor doesn’t make a recurring deposit payment for six months, the bank can close the recurring deposit account.
Deposit Insurance Covered Covered

How to Decide Whether Fixed Deposit is Better or Recurring Deposit?

One needs to be very subjective while choosing between fixed deposit and recurring deposit. Both the investment schemes offer high-interest rates and provide safe and secure investment options.

A fixed deposit is the best option for the investors willing to invest a lump sum amount. In addition, they help manage the regular cash flow. Fixed deposits offer capital protection and flexible pay-outs based on the investors’ convenience. Let us take an example of retired individuals. If they invest their retirement benefits in a long-term fixed deposit, they can opt for monthly or quarterly interest pay-outs to deal with their expenses.

On the flip side, a recurring deposit investment offers the flexibility of making small payments and accumulates a large amount at the completion of the tenure. This is the reason recurring deposits are more convenient for investors who can easily set aside small amounts every month. Let us take an example of a salaried employee. They can easily invest in a recurring deposit scheme by investing a small part of their income in the recurring deposit every month.

Both fixed deposit and recurring deposit are good investment options. One needs to consider the availability of funds while choosing the suitable one. A fixed deposit may be the right option if an individual has the lump sum amount available. And for individuals who wish to invest in small amounts, the recurring deposit is a better option. 

The Bottom Line

We hope this article helps you in making an informed decision about your choice of investment options out of the ones available. It all boils down to which option fits better in your way of living. The most important thing is to weigh your options carefully before investing.

Ruchi Gohri
Ruchi Gohri

Senior Content Writer | She has a penchant for writing and with over 5 years of experience, she plays around with words elegantly, crafting simple content for all to read. In her free time, she loves her couch either to read or catch on to her sleep.