Personal Finance

Make the most of flexible RDs

Keerthi Sanagasetti |A Srinivas | | Updated on: Jan 17, 2022

The product doesn’t have the rigidity that is associated with its traditional avatar

Tiny drops make the mighty ocean – this adage may seem relatable to most of us, when it comes to our savings. But for those of you petrified by the soaring equity valuations, SIPs in MFs may not be a preferred route. Conservative investors keen on safety of corpus, can consider bank recurring deposits (RD) as an alternative.

A regular bank RD enables you to deposit a fixed sum of money every month over the chosen tenure. The interest rates offered by banks on the RDs is usually akin to the rate offered on their fixed deposits with similar tenure. But remember, your overall return is higher in an FD as you deposit the entire amount in one go, and interest is calculated on the full amount since day one. Whereas in an RD the additional instalments fetch you interest for the remaining tenure only.

The monthly instalment of an RD is fixed at the time of opening the account and cannot be changed later. Besides, depositors are also penalized for delayed deposits of monthly instalments and premature withdrawal. This rigidity in RDs can be bummer for those with irregular streams of incomes. Enter Flexi-RDs.

Read the fine print

Flexi RDs give investors the flexibility to make multiple deposits several times each month. However, most banks require you to deposit a certain amount (called the core instalment), every month and subsequent investments of a higher amount - up to a maximum limit - can be invested in any month, if they so desire.

For instance, while SBI’s Flexi Deposit requires a minimum of ₹5,000 to be deposited in every financial year, deposits can be made any number of times. However, one cannot deposit beyond ₹50,000 in any financial year.

Besides a penalty is levied for defaults in payment of the minimum deposit—stipulated at ₹50 per financial year, in the case of SBI’s Flexi Deposit.

Consequently, most flexi-RDs offered by banks may not be the best fit for investors who experience dry cash flows in certain months and lumpy cash flows in the remaining part of the year. For them HDFC Bank’s My Passion Fund and ICICI Bank’s iWish Goal Based Savings Account can be alternatives to choose from.

More flexible options

The HDFC Bank’s My Passion Fund is a curated flexi RD that offers slightly higher degree of flexibility. While the customer is not penalized for defaults in deposit instalments for up to six instalments, customers can add top-up instalments in any month, up to a maximum of twice the original instalment amount. Besides, customers can make up to three top-ups in any month. The base instalments paid every month can range from ₹1,000 to a maximum of ₹14,99,900 and investors can opt for a tenure from 6 months to 10 years.

Currently, HDFC Bank offers an interest rate of 3.5 to 5.5 per cent, per annum on its My Passion Fund instalments, akin to its FD and RD rates, for tenures ranging from 6 months to 10 years. The bank may however close the account prematurely (with ensuing charges), in case more than six instalments are in arrears.

ICICI Bank’s iWish Goal Based Savings Account goes a step further and allows investors to deposit any amount (ranging from ₹50 to ₹49,999) at any time during the tenure of the RD, as per the availability of funds. This is however only available for existing savings account holders of ICICI Bank (who have opted for net-banking facility). Depositors can ideally use this account to set goals such as buying a car or vacation. They can then select the tenure (ranging from 6 months to 5 years) and the maturity value one wants to earn at the end of the tenure. Basis these inputs and your age (whether a senior citizen or not), the iWish calculator on the bank’s website throws a said amount that you can save regularly --- hence the name goal based savings account.

ICICI Bank offers 3.5 to 5.4 per cent interest p.a. for tenures ranging from 6 months to 5 years on such RDs.

One can actively manage up to 25 iWish Accounts using the bank’s net banking facility, with each iWish account (maturity value) ranging from ₹5000 up to a maximum of ₹5 lakh.

In both these curated RDs, the interest is calculated from the date of instalment or top-up being deposited. While both don’t penalize the depositor for delays in payments, premature withdrawals may entail a lower than expected yield. In case of HDFC Bank, the interest rate applicable on premature closure of deposits will be lower of original or contracted rate and the base rate applicable for the actual deposit tenure.

Apart from revising the interest based on the actual tenure, ICICI Bank may further levy a penalty of 0.5-1.5 per cent, on premature withdrawals from iWish accounts.

Published on December 25, 2021
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