Personal Finance

Invest that surplus in flexi RDs

Nalinakanthi V | Updated on July 09, 2019 Published on July 09, 2019

Unlike traditional RDs, these allow you to invest variable sums of money every month

The RBI’’s interest rate cut in June and its accommodative stance with respect to interest rate are probably an indication that one can expect more such cuts in the near future. Though Indian equities have had a good rally over the past couple of months, volatility remains. This, coupled with expectations of further rate cuts, makes a case for fixed-interest investments now.

If you are looking at options in this space, besides fixed deposits, post-office savings schemes and debt mutual funds, you can consider the old workhouse — bank recurring deposit schemes.

RDs offer small-ticket regular investing (as low as ₹100 per month in some cases) and and long investment tenures of up to 10 years. Some also come with the sweetener of changing the regular investment amount.

Welcome to flexi RDs in which you can now invest variable sums of money every month. This is in contrast to traditional RDs, where you can invest only a pre-agreed sum every month.

While most banks offer flexi RDs, the features can vary. As the first step, most banks ask you to choose a tenure and the core amount for your RD. This is bare minimum monthly core amount which will remain constant, once pre-agreed.

The range of the core amount also varies across banks. For instance, in Central Bank of India’s Swa-Shakti Flexi RD, it can be between ₹100 and ₹1 lakh, in multiples of ₹100.

In contrast, some lenders such as Bank of India only stipulate the minimum core amount, with no cap on the maximum. The minimum investment under Bank of India’s flexi RD is ₹500 for urban and metro branches, and ₹100 for rural and semi-urban branches.

Likewise, some banks also have a cap on the maximum additional investment you can make every month. Central Bank’s RD scheme allows you to invest a maximum of 10 times the core amount as the total monthly investment.

Also, the additional sum can vary month on month. For instance, if you got a festive bonus in a particular month and you made an additional investment of ₹90,000 on your core RD of ₹10,000, you can choose to limit your subsequent month’s RD instalment to ₹10,000, depending on the surplus available for investment.

Bank of India, on the other hand, has no limit on the maximum additional amount you can invest every month.

On the core amount, most banks offer interest rates that are comparable to that of term deposits of a similar tenure. The additional amount will earn interest at the rate applicable at that point in time. Consider, you signed up for a two-year RD with a core amount of ₹10,000 and the rate interest at the time of opening the account is 9 per cent. If you happen to earn a bonus of ₹50,000 and decide to invest the surplus, but if the interest rate is cut to 8 per cent, your interest amount will be calculated thus. On the core instalment of ₹10,000, you will earn an interest of 9 per cent every month. The interest rate on the flexi instalment of ₹50,000 will be 8 per cent.

Charges

Remember that flexi RDs are subject to the same penalties that are applicable to normal RDs. While flexi RDs are a great vehicle to invest systematically, there are two aspects that you need to keep in mind before you invest. One, some banks may charge you a penalty in case you do not make the core instalment payment on time. Under Bank of India’s Star Flexi RD, delayed payment of core instalment will attract a penalty of ₹1.5 for every ₹100 invested in schemes with a maturity of up to five years, and ₹2 for ₹100 per month if the maturity is over five years.

Similarly, failure to meet the minimum investment criteria of ₹5,000 under SBI’s Flexible Deposit Scheme will cost you ₹50 per financial year. Central Bank of India doesn’t charge penalty for delayed payment.

Two, if you want to close your RD before maturity, you may have to part with a portion as penalty. For instance, if you want to withdraw the amount in your Star-Flexi prematurely — within three months from the date of investment — you will not get any interest on both the core and flexi instalments. If you want to close the RD after three months but before maturity, you will be paid after deducting pre-closure charges for the completed period.

SBI will deduct 0.5 per cent from the interest rate applicable for the period for which the amount remained with the bank, as penalty.

Central Bank, however, allows you to pre-close without having to pay any additional penalty.

The writer is an independent financial consultant

Published on July 09, 2019

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