As with fitness, by investing too, small, consistent steps over time can make a big difference. So if you find it difficult to set aside large sums for investment, recurring deposits (RD) offered by banks can be a good alternative.
This is especially true for cautious investors in the lower tax brackets. Interest income from banking R&D, such as term deposits (DF), is taxed at the personal income tax rate.
What’s on offer
A regular banking RD allows you to deposit a fixed amount of money each month for the chosen deposit term. Banks generally offer the same rate on their RD as on their FD of the same duration. But your overall return is higher in an FD because you deposit the entire amount at one time.
You can start a regular RD with a fixed monthly deposit of as little as ₹ 100 or ₹ 500, and in multiples of it (up to a total amount of less than ₹ 2 crore). The monthly payment is set when the RD account is opened and cannot be changed subsequently. You can set up an ECS (Electronic Clearing System) mandate for direct debit from your bank account.
Note that any delayed monthly payment results in a penalty. A few consecutive months of skipped installments can also result in the RD account being closed. The premature closure of an RD by a client is also penalized.
Some banks also offer flexible R&D, which, as the name suggests, offers some flexibility compared to regular R&D. Flexi RD offers you the possibility of making multiple deposits several times a month if you wish. However, in many cases there is an overall upper limit. For example, you can deposit up to 50,000 per fiscal year and up to 10,000 per month, respectively in the flexi deposits of SBI and Bank of Baroda.
In many cases, but not all, customers aren’t even penalized for missing a monthly flexi RD deposit payment.
While this feature offers relief when you’re short on cash, it also doesn’t help impose disciplined investment. On this point, regular RDs score compared to flexi. Most banks offer the same interest rate on their regular and flexi deposits.
What to choose
Investors can consider the regular one-year RD from Equitas Small Finance Bank (SFB) which offers 6.35 percent per year. Seniors receive a supplement of 0.50 percent. Given the current low interest rates, investors would be better off not committing to longer term deposits.
The rate offered by Equitas SFB is higher than the 4.9 – 5.4% and 4.9 – 5.75% offered by many banks in the public and private sectors, respectively on their RDs of one to two years. A few private sector banks such as RBL Bank and DCB Bank also offer attractive rates, but Equitas SFB Bank fares better than these banks on measures such as CRAR (weighted capital / risk ratio), gross NPA (assets non-performing) and net interest margin.
You can open an RD account with Equitas SFB from a minimum deposit of just 100. While the bank does not impose any penalties for missing the fixed monthly payment, three such instances will result in the account being closed. The premature closure of the R&D by the client results in a penalty of 1%.
Equitas SFB, which started its activities as a small financing bank in September 2016, has a diversified loan portfolio of which 81% of guaranteed loans. In March 2021, the bank’s gross ANP stood at 3.59%, compared to 4.16% (proforma) in the previous quarter. The bank’s CRAR, higher than prescribed, of 24.18%, also offers comfort.