Want to save for a purchase or an event in a systematic way? The amount needed could be for anything- purchase of a car or even an expensive LCD. If you have a three-year time frame and are wary of the vagaries of equity market, you can consider a recurring deposit. If you can spare the money for five years, you can even look at opening a recurring deposit with a post office.
How does it work?
In recurring deposit you fix a certain amount, which is debited from your savings account, just like a SIP. This total amount, along with the interest amount, comes back into your account at the end of the fixed period.
When does it work?
This investment is ideal if you are looking to save small amounts of money month after month. In a way, it's lighter on your pocket, especially at such times when daily expenses are touching the roof. Moreover, it instils in you financial discipline.
You can open a recurring deposit either with banks or with the post office. The minimum amount of investment varies from bank to bank. For example, in ICICI Bank and HDFC Bank, the minimum investment amount for RD is Rs 500 per month, whereas in Axis Bank, it is Rs 1,000. The tenure usually ranges from six months to a maximum period of 10 years.
The investment amount is lower at Rs 10 per month for post office but the tenure of investment is five years. However, it allows partial withdrawals.
Most banks allow only premature withdrawals. The interest rate applicable for premature closure of deposits (all amounts) will be the lower of either the base rate for the original or contracted tenure for which the deposit has been booked, or the base rate applicable for the tenure for which the deposit has been in force with the bank.
Also, an investor has the option of prematurely withdrawing the amount after three years in post office RDs. Bank rates are over 8% for one-year RDs. The post office offers a rate of 7.5% (quarterly compounded) on the five-year RDs.
Source: Economic Times
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August 24, 2011