At the end of the tenure, the maturity amount is paid back to the individual that includes the principal invested and the interest earned. There are RDs that can be for a variable amount while in most cases it is a fixed amount that is saved each month.
When one does not have a lump sum to save for a short term goal, RD comes handy as it helps to save some amount each month. Ultra conservative investors who look for fixed returns with no volatility may consider an RD to create a corpus to meet the goal which is about a year away.
One can open a recurring deposit either with a bank or with the post office. The minimum amount of investment varies from bank to bank and you can generally invest with a minimum amount of Rs 500 or Rs 1,000. The tenure usually ranges from six months to a maximum of 10 years. In some banks, for online RD, the minimum tenure may be 12 months. The investment amount is lower at Rs 10 per month for post office RDs but the tenure of investment is five years.
The RD account may be opened either offline by visiting a bank where you have a savings account or by logging on the bank’s net banking. For opening the RD in the post office, one has to visit the nearest post office.
Online opening of RD account
After logging on with your Internet banking username and password, you can open an RD account online. Typically, online RD can be opened only between 8 AM and 8 PM. The name and mode of operation and branch of a newly generated RD account will be same as in the savings account from which RD account is funded.
On submission of a request for opening a recurring deposit account, a standing instruction will be set up to debit installments to the indicated savings account every month for the tenure and amount selected. Some banks may allow offline deposit of RD instalments, however, the first instalment needs to be made online.
The first instalment shall be debited on the date of opening of the recurring deposit account. Subsequent installments shall be debited on the selected day of the month. Some banks may give the option to choose the instalment date while some may not. And, on maturity the funds will be credited to the savings account selected by you for opening the RD.
Steps to open RD with SBI
1. After logging in to net banking, under Fixed Deposit, click on ‘e -RD (RD) / e- SBI Flexi Deposit’
2. If you have more than one account in the bank, all will be shown, i.e., savings and current accounts.
3. Choose the one with which you wish to link your RD account
4. Choose amount of monthly instalment and the tenure. The tenure will decide the interest rate which is usually similar to the fixed deposit rate. Senior citizens may get additional interest rate.
5. Click the senior citizen option, if eligible.
6. Opt to receive the maturity amount into savings account or convert the maturity amount into a fixed deposit.
7. After validating for ‘terms and conditions’, click on submit.
8. On the next page, name, mode of holding and nomination as per the linked savings account will be shown.
9. Once you press the confirm button, the RD gets created and a reference number and an e-RD account number gets generated.
10. You may view, download and print the e-RD details.
11. Additionally, if you wish to set up a Standing Instruction (SI), you can do it online.
One may cancel the standing instructions, which are set through Internet Banking and close the RD before maturity. Only those RD accounts opened online can be closed online. On pre-mature withdrawal of the deposit, interest will be calculated at the rate applicable for the period the deposit has actually remained with the bank, less applicable premature withdrawal penal rate.
Knowing the maturity value
To know how much you will accumulate via investing in an RD, many banks have an RD calculator.
Alternatively, one may use the formula to know the maturity value. The formula used for arriving at the maturity value of a recurring deposit over a certain period at a certain interest rate is:
The formula is: A = P*(1+R/N)^(Nt)
Here, A is the maturity amount in rupees, the recurring deposit amount is ‘P’ in rupees, ‘N’ is the compounding frequency, interest rate R in percentage and ‘t’ is the tenure.
For a 12 month RD of Rs 5,000 at 8 percent per annum, the maturity value (in case of recurring deposits, the compounding happens on quarterly basis) will be the sum of the series as below:
A = P*(1+R/N)^(Nt)
= 5000*(1+.0825/4)^(4*12/12) = 5425.44
= 5000*(1+.0825/4)^(4*11/12) = 5388.64
= 5000*(1+.0825/4)^(4*1/12) = 5034.14
Total maturity value ( sum of series) = Rs 62730.85