Bank deposit
FDs and RDs are both fixed instruments and offer more or less same features. So how would you decide which is better for you? Image Credit: Shutterstock

Dubai: Savers always hope to earn high interest on their money while not taking on too much risk, and what’s still proving to be mainstream is the age-old way of growing savings through bank deposits. But there are now more ways than ever to help you make the most of your money.

While decades have passed since locking up your savings at a bank in the form of Fixed Deposits (FDs) became a preference when saving for long term financial goals, Recurring Deposits (RDs) have been consistently popular when it comes to setting money aside for more immediate objectives.

Fixed Deposits (FDs) over Recurring Deposits (RDs)?

Those who don’t have money to invest in a FD but can afford a small portion of investment amount from income every month can opt for a RD instead of an FD. However, if you have a lump sum amount to invest at one go, FD is better for you. But it gets complex choosing between the two.

“Despite the popularity of this ‘simple and safe’ investment avenue, many fail to unlock all the benefits of bank deposits,” explained Anil Pillai, a Dubai-based banking industry analyst. “This is because FDs and RDs are so similar in nature that it’s easy to get confused about which to choose.

“While the comparison of a bank FD versus an RD is based more on convenience and practical needs than on the comparative returns, the attraction for both these instruments is the fixed return with the safety of money invested and the practicality of the instruments that win the RD-FD debate.”

How FDs fare against RDs: An example
Let’s say an investor named Adam has set aside savings of Dh60,000 which he puts in an FD giving 7 per cent yearly growth. In the second instance, another investor Richard instead opts for a RD of Dh5,000 per month at the same rate of 7 per cent per year.

Using interest calculators we find that the total profits or interest earned on the FD is Dh4,331 while the interest earned on the RD for the year is Dh2,311. The FD earns more interest because the entire Dh60,000 is locked in for 12 months whereas for RDs, interest is calculated on monthly investments.

To explain it further, on RD, only the first month deposit completes 12 months and hence earns interest for 12 months. The second deposit earns interest for 11 months and so on. However, with FDs, interest is calculated over a bigger sum that’s invested entirely at the start, so profits are bigger.

How much of your savings can you lock-in for long?

Although higher profits makes it easier to choose between FDs and RDs, the final decision boils down to how much of your savings you can lock-in and for how long. When the answer to this turns uncertain, you’ll prefer RDs over FDs as the former does not require more money to invest at one go.

“RDs are apt for those aiming to save gradually and earn consistent returns,” explained Jose Paul, an Abu Dhabi banker with over two decades experience in customer advisory services. “It’s easier for salaried customers to set aside every month as savings and for this RD is the best option.

“Also, the rate of interest for RD is locked which will protect the investor from interest rate swings. Step-wise-step wealth accumulation may seem like a challenging task in the beginning, but it’s effective to build savings gradually especially when you do not have a large sum to invest at one go.”

Bank deposit money
While a salaried person can invest in RDs since he or she receives regular income while a person having lump sum amount can invest in FDs, anyone with a larger amount can stand to earn more.

Earn more from your deposits by reinvesting your deposits

In order to get much more profits from your bank deposits, Anil Pillai assures that a sure-shot, yet often overlooked way of going about it is reinvesting the amount you get at the end of the term into another FD. Plus, this feature can be automated as well, making it easier and hassle-free for you.

“When the end-of-term amount is reinvested, the returns can be maximised. So if your bank offers a reinvestment of interest option, go for it. This is because the monthly or quarterly compound interest will generally make your term deposit worth more,” added Pillai.

But how does this work out in terms of interest or profits earned and how does this translate into savings? For instance, an interest of 7 per cent in a year would mean a return of 7.2 per cent in a year if the reinvestment option is opted for – which is what you get when you reinvest it just once.

Reinvesting deposits, multiplies them: An example
Let’s say Dh10,000 was invested at the start of the year. This will amount to Dh10,720 by the end of the year, if you reinvest it once. The key is the growth doesn’t end at one reinvestment – the more you repeatedly reinvest your deposits, the bigger it grows.

Also, the interest earned is compounded or multiplied every three months. An interest of 7 per cent in a year would imply an interest of 1.75 per cent in a quarter (7% divided by 4). So Dh10,000 invested would earn an interest of Dh175 (1.75 per cent of Dh10,000) at the end of just three months.

Repeating this process for the next three quarters, the person accumulates more at the end of the year, which is higher than the interest earned without reinvesting. Therefore, investors who do not need a regular income from the FD could maximise returns by opting for the reinvestment option.

Verdict: RDs or FDs – which earns you better profits?

Both FDs and RDs are fixed instruments and offer more or less same features. While a salaried person can invest in RDs since he or she receives regular income while a person having lump sum amount can invest in FDs, anyone with a larger amount can stand to earn more. But that’s not all.

“Your choice between RD and FD hinges on your circumstances and goals. For guaranteed returns from a lump sum, an FD is suitable. For consistent savings growth over time, an RD is preferable. Account for factors like rates, tenure, penalties, and personal finances before deciding,” added Paul.

“Whether you choose to have your FD interest paid monthly, quarterly or annually, make sure you don't need the funds back before its maturity. This will help you not only budget and avoid premature withdrawal charges from the bank, but earn you more by reinvesting your earnings.”

However, not every monthly or quarterly FD comes with the same interest rate. While it goes without saying that you would stand to benefit by choosing one that gives you more returns, keep in mind that a miniscule change in the rate affects your end-of-term gains over the long term.