Time to start a Recurring deposit

With interest rates almost at their peak, it is the right time to lock your funds in good debt instruments. But what if you don't have a lump sum to invest? This is where recurring deposits come in handy. Anindya Mitra, senior vice-president, retail liabilities product group, HDFC Bank, says, "Interest rates have peaked and are likely to come down now. So, it's a good time to invest in recurring deposits at the current rates. In fact, these score over fixed deposits as you don't have to block a huge chunk of money, while the interest rates are almost the same."

How do these work?

Recurring deposits are similar to systematic investment plans and fixed deposits. You make a fixed investment every month, which earns a certain rate of interest. At the end of the tenure, you get a lump sum, which is equal to the total amount invested, along with the interest earned on it.

Anyone can open a recurring deposit with a bank or post office, including a Hindu Undivided Family (HUF). "While NRIs cannot open a recurring deposit in a post office, they can set up an account under their NRE accounts with banks or other financial institutions," says Suresh Surana, founder, RSM Astute Consulting Group.

The minimum investment is Rs 100 at most banks, while post offices accept even an initial amount of Rs 10. Some banks have an upper limit of Rs 15 lakh and the tenure varies from six months to 10 years. Senior citizens are eligible for a higher rate of interest, usually 0.5% more than that for other investors.

Typically, a bank insists that you open a savings account with it before opting for a recurring deposit. This is because your monthly instalments will be routed through this account.

Keep in mind

Experts advise that you fix the monthly instalment according to your needs and affordability so that you don't miss an instalment in the future. "It is important that you don't over-commit by agreeing to pay a high amount, which you may find difficult to pay later. This may lead to a default, which could result in a penalty," says Jayant Pai, CFP & head, marketing, Parag Parikh Financial Advisory Services. The penalty will depend on the monthly instalment and the number of days by which you have delayed the payment. It will be deducted from the interest that has been accrued on the deposit till then.

If you default frequently, your account could even be shut down. "If you fail to pay the instalments on time, the bank or post office has the right to close your recurring deposit account. In such a case, the interest rate applicable to your account will be altered according to the premature withdrawal policy of the institution," says Sumeet Vaid, founder, Ffreedom Financial Planners.

Each bank has its own policy on dealing with defaulters. For instance, if you default for five consecutive months, HDFC Bank will send you a notice, and if you fail to pay for the sixth month too, the bank will shut down your account. The post office excuses a defaulter four times and also extends the payment period to two months, after which it will axe the account. DCB Bank does not charge a penalty, but it will consider an account inactive if you do not deposit any money for two years. A holder of such an account will be sent a notice, after which the bank may take a call on closing it.