Time deposits are fixed income instruments where the sum of money is kept for a fixed maturity and the depositor is not allowed to withdraw this sum till the end of the maturity period. They are called time deposits because the funds are locked in for a period. In return for blocking of capital, a fixed rate of interest is paid out.
There are two types of time deposits:
- Recurring Deposits
- Fixed deposits
In a recurring deposit, a fixed instalment is invested on a fixed date every month. In most cases, this interval is once a month. The investments earn interest on them till the maturity period. To put it simply, a recurring deposit is like opening several different fixed deposits, each with the same maturity period.
Once the sum of money and the tenure of the RD is fixed, it cannot be changed. Premature withdrawal is possible, but there will be a penalty in the rate of interest that is given by the bank. The minimum recurring deposit amount is INR 1,000 and can be increased in multiples of INR 100. The minimum period of investment for a recurring deposit is 6 months and the maximum period is 10 years. The rate of interests on recurring deposit ranges between 7 per cent to 9 per cent.
It is where a sum of money gets invested for a fixed duration. The duration of fixed deposits is flexible. It can range from seven days to seven years. The rate of interest for the fixed deposit depends on the period for which the funds are locked in.
Just like a recurring deposit, an FD cannot be withdrawn until the maturity period. Premature withdrawal is allowed after the bank charges a penalty in the rate of interest. The minimum amount of investment for a fixed deposit is Rs. 1,000. The rate of interest on the fixed deposit ranges from 4 per cent to 7.5 per cent.
Some banks provide the option of a sweep in facility where the amount above a balance in a savings account is automatically converted to a fixed deposit. This helps the savings account earn more interest.
Time deposit vs fixed deposit:
An FD is kept for a longer period and hence it earns a higher rate of interest. A recurring deposit takes a defined sum and invests it every defined period. This means each instalment earns interest for a lesser period than the previous instalment. The interest on a fixed deposit for the same maturity is more than that on a recurring deposit.
However, a recurring deposit is a convenient way of investment for people who have a fixed investment amount per month. As such, the investment type depends on the goals and funds available.
A time deposit encompasses fixed deposits. They provide a stable way for people to make some income with their savings.