power of compounding : The Recurring deposit…

Compounding works by growing our investments many times. This is done by adding our interest or profits back to the principal and the entire amount is reinvested to get more return. In banking transactions compounding is the process where interest is calculated on the principal as well as the interest already credited to the principal. so it is interest on interest. The cumulative effect of such interest payments magnifies the returns over a period of time and the investor is rewarded handsomely.

The frequency of compounding and the period of investment play a very important role in wealth multiplication. Normally banks compound interest on deposits on a quarterly basis which means the investment we make gets interest addition four times in a year and each addition of interest to the principal becomes eligible for further interest in the next quarter. Compounding is done on a half-yearly basis also in some schemes. While compounding interest is welcome if we are a depositor but if we have taken a loan from the bank we should pay the interest and installments in time to avoid overdue and compound interest which will be a loss to us.

Recurring Deposits:

Recurring Deposits let the customer remit a fixed amount every month into the account and earn interest compounded on a quarterly basis. The installments can be remitted on any day during the month or on a fixed date every month. The deposit matures for payment one month after the last installments become due and have been paid. For instance if a customer opens a RD account on 5th of August for a period of three years and all the 36 instalments are paid on 5th of the month then the maturity value can be repaid on 5th of August in the third year. If the instalments have been on any random date every month then the maturity proceeds can be paid only on the last day of August in the third year.The important thing to note is that the last instalment should have fallen due and been oaid. Also if all the instalments upto 35 month were paid on 5th but due to some reason the 36th instalment was paid on the 8th of the last month then the due date will be reckoned as 8th of August .

Flexi Recurring Deposits.

Some banks offer a flexible instalment RD scheme whefrein you can vary your instalments depending upon your monthly surplus keeping a base amount as minimum instalment and vary the amount in multiples of the base amount. For example start a RD with Rs 2000 as instalment and if during the tenure of the RD we get any surplus income then we can pay extra amount in the RD in multiples of Rs 2000. All other terms will remain same like regular RD account. We can also save for a targeted maturity amount like Rs 5 lacs after 5 years wherein based on the prevailing rate of interest the monthly instalment can be tailormade.

Delayed payments

Banks charge a fine if any monthly instalment is delayed beyond that particular month. The penalty so charged varies from bank to bank.

who can open a Recurring deposit account?

The account can be opened by an individual depositor.

jointly by two or more persons with suitable repayment clause

A minor by the guardian

partnership firms, clubs, societies etc.

Necessary KYC documents such as address proof, PAN no, Identity proof etc need to be submitted while opening the account.Recurring deposits can also be opened using internet banking sitting at home.Banks have prescribed certain rules for online opening of accouts and these stipulations vary from bank to bank and it is necessary to be familiar with these set of guidelines .

Deposits can be prematurely closed subject to reduced interest as applicable for the period run.

loans can be availed upto 80 or 85 % of outstanding balance.

Loan sanctioned will be at a higher rate of interest normally one/two percent above what we get on the RD account.

Other points to be noted:

The monthly instalments can start from Rs 500/1000 depending on the place.

monthly instalments can be directly debited from savings account with proper standing instruction lodged with the bank.

the regular monthly payments cultivate the habit of savings in the minds of the depositors.

Children should be encouraged to go to the banks and pay the RD instalments by filling up the necessary forms in the bank. initially for a couple of times elders can accompany them.

the monthly outflow is very low and not burdensome if one has the jnclination.

Though other investments like stocks, mutual funds etc may give a higher return investing in such instruments requires special knowledge and also subject to market risks.

TDS is applicable on interest earned from RD accounts beyond 40000 a year.

With interest rates inching upwards since a couple of months it is the right time to open a RD account and lock in the applicable rate to enjoy the returns later.

Recurring Deposits are the best friend for the common man.

with more on Deposits next week,

pichai iyer,


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