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A Bank Fixed Deposit or A Recurring Deposit
Sumati Sengupta is a working woman in her late twenties. Going by the prevailing high interest rates in the market, she thinks bank deposits are an attractive investment option. However, she has no knowledge about these products and is not sure which one she should opt for. Should she choose a fixed deposit or a recurring deposit?
Both the products provide safety of investment with fixed returns over a predefined period. They also offer comparable rates of interest and similar compounding frequencies. The liquidity profile of both the deposits is also similar. Sengupta could either take a loan against the deposit or withdraw the amount before maturity, subject to some penalties. Despite these similarities, there are certain features that she should consider while making her choice.
While comparing the two products on the basis of returns, fixed deposit ranks higher. The difference is due to the fact that Sengupta would be committing the entire amount upfront and, hence, the amount would earn interest for one year. However, in the case of a recurring deposit, the value will increase incrementally every month. So, the investor would lose out on the benefit of compounding, which is available in case of fixed deposits. The longer the tenure, the higher the benefit available in a fixed deposit.
The interest received on both products will be taxed at Sengupta's marginal tax rate. However, if she were to opt for a fixed deposit, the bank would deduct tax at source (TDS) if the interest income in one year exceeds `10,000, which is not the case with a recurring deposit.
Finally and, most importantly, the amount that Sengupta can spare at a given point for such an investment will determine the product that she should opt for. In case she is looking to invest small monthly savings at regular intervals, a recurring deposit will be a more viable product. However, if she is considering a lump sum investment, then a fixed deposit would be a better choice.
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