How A Recurring Deposit Can Help Lock High Returns For A Longer Time

There are several opportunities that crop up for investors in various asset classes at different time periods, so it is crucial for them to lock in the benefits when they are available.

On the fixed income side, a situation of higher interest rates makes it an opportune time for the investor to reallocate their funds to higher-yielding choices. The best option would be to lock in to instruments for a longer time period so that a higher return is earned for this entire duration. A tricky situation arises when the investor does not have a large amount to invest at the current juncture. This is where a recurring deposit can help them lock into rates for a longer period of time without requiring a large upfront investment.

A recurring deposit is similar to a fixed deposit, where the investor invests an amount for a certain time period, after which they get back the amount with interest.

The big difference between an investment with a fixed deposit and a recurring deposit is that in a recurring deposit, the investment has to be made every month for a specific time period that has been chosen. In a fixed deposit, the investment is one-time, and this will complete the process. The investor has to make the regular deposit each month in the recurring deposit, and they will get back the full amount with interest once the time period that has been selected at the time of opening the deposit is completed.

One of the problems with a fixed deposit is that you have to make a separate deposit for each amount that you invest. This means that if you make 10 investments, then there will be 10 deposits, and managing this will become your responsibility, and this can be a nightmare. This creates a tricky situation for those who do not have a lump sum and would like to invest on a regular basis, because their savings or money will come on a regular basis. This is where the recurring deposit is helpful, as the very nature of the deposit ensures that there is a regular investment possible that matches with the manner in which the cash flow is coming in.

The advantage of undertaking a recurring deposit during a period of higher interest rates is that one can lock in for a long period of time.

The key feature of a recurring deposit is that the interest rate applicable for the relevant period at the time of investment is locked in for the entire duration of the deposit. This ensures that the investor can adopt a strategy in such a way that they make a recurring deposit that earns them a high interest rate.

For example, if the prevailing interest rate for a 10-year deposit is 7.75%, then starting a recurring deposit during this time period will ensure that the rate is earned for the next 10 years, no matter what happens in the interim period.

The side benefit or advantage of locking in for a longer time period is also that the interest rate that is earned is high. Normally, for longer-term deposits, the interest rate is higher, though it might not be the highest rate offered by the bank at a particular point in time, as higher rates depend on the position that the bank finds itself in and when they need the money. The higher rate advantage is that the investor is able to boost their overall returns from the fixed-income instrument. There are various banks that the investor should check before selecting the appropriate option, but this can be a good choice for their fixed-income portfolio.

Arnav Pandya is founder Moneyeduschool