The Best Alternative Option for Recurring Deposits

  last updated on: 25-Nov-2024 08:23PM IST

Maximizing Investment Returns with Alternative for Recurring Deposits in India:

Investors are always on the lookout for ways to grow their capital with minimal risk. Among the safest and most reliable options are Fixed Deposit (FD) and Recurring Deposit (RD), both offering decent returns while ensuring high safety and easy liquidity. While there are other investment options available, these two remain the most popular choices for risk-averse individuals.

Why Fixed and Recurring Deposits are Popular Investment Choices:

For those with substantial capital, Fixed Deposits (FD) provide an excellent opportunity to generate passive income. With FD, investors can earn fixed interest over a specific period, ensuring consistent returns and capital safety.

On the other hand, Recurring Deposits (RD) are ideal for individuals who want to build their capital gradually through systematic installments. This method is especially beneficial for those who may not have large sums of money upfront but still wish to save and earn interest over time.

How recurring Deposits help build Capital:

Recurring Deposits allow investors to save a fixed amount regularly (e.g., Monthly) and earn interest. They offer a higher interest rate compared to regular savings accounts and are a secure way to grow your wealth. Depending on the bank and the tenure of the RD, interest rates typically range from 6% to 7.25% for regular citizens and 7.25% to 7.65% for senior citizens. Recurring Deposits offer compound interest, and your returns will depend on the deposit tenure and interest rates offered by the bank.

Let's take an example of investing  10,000 INR per month for 6months in a Recurring deposit. We can calculate the return using the interest rates provided by one of India's biggest banks. 

From HDFC for the general citizen as on 21st November 2024,

HDFC RD Calculated Amount for Six months with 10000INR per Month for general citizens

Let's check With the highest possible rate of 7.5%,

With a maximum of 7.5% per annum for 10000INR per month

So, What's the alternative option for recurring deposits, and how can that be done?

The alternate option for RD is to invest in T-BILLS (Treasury Bills). If you are unsure about T-BILLS please read the article from Cleartax.

Now you might know the available tenures of T-BILLS (91, 182, and 364 days) and T-BILLS can be purchased either through your stock broker or directly from RBI (Reserve Bank of India) Retail Direct Gilt Account. You can use the link to open your RBI retail Direct Gilt account.

Maximize your Returns: How to earn More than Recurring Deposits

At the time of writing, the annual return rate on T-Bills is between 6.6% and 6.8% per annum. If you're not a senior citizen and are looking for a low-risk, short-term investment option, there's a strategy that can help you earn more than you would from a recurring deposit. Here's how you can maximize returns on your investment.

How to Get Higher returns than recurring deposits: A Step-by-Step Guide

Let's assume you want to invest 10,000 every month for 6 months (from November 2, 2024 to May 2, 2025). Follow these steps to understand how this investment strategy works:

Step 1: Choose a 91-day T-Bill for Investment

The first step is to select a 91-day Treasury Bill (T-Bill) for your investment. T-Bills offer a secure way to grow your money with attractive returns.

Step 2: Invest 10,000 on November 2, 2024 as First Month

For your first month, invest 10,000 on November 2, 2024. This T-Bill will mature in 91 days, on February 1, 2025. On the allotment date (November 2) you'll receive the discounted value of the T-Bill, and by February 1, 2025, you'll receive the full 10,000 back. If you're unsure about how T-Bills work or how the discount value is calculated, check out the detailed guide on ClearTax.

Step 3: Invest 10,000 on December 2, 2024 as Second Month

In the second month, invest another 10,000 on December 2, 2024, This T-Bill will mature on March 3, 2025.

Step 4: Invest 10,000 on January 2, 2025 as Third Month

As a third month, on January 2, 2025, invest another 10,000. This T-Bill will mature on April 3, 2025.

Step 5: Invest 20,000 on February 2, 2025 as Fourth Month

By February 1, 2025, your first T-Bill will mature, and you'll have 10,000 credited back to your account. Invest 20,000 on February 2, as your first-month T-Bill has matured. This new fourth-month T-Bill will mature on May 3, 2025.

Step 6: Stop Investment After the Fourth Month - Fifth Month

The maturity Date for your fourth-month T-Bill will mature on May 3, 2025. This Marks the end of the 6-month investment plan you started in November 2024. But By the Fifth Month, the Second Month's T-Bill will mature and 10,000 be credited back to you on 03rd March 2025.

Step 7: T-Bill maturities on the Sixth Month

In the Sixth month(April 3, 2025), your third month's T-Bill will mature and you'll receive 10,000 back.

Step 8: T-Bill maturities on the Seventh Month

In the Seventh month(May 3, 2025), your fourth month's T-Bill will mature and you'll receive 20,000 back. Your investment tenure ends here as per your investment plan.

Please refer to the below image to get a better understanding of the Investment method.

TBILL Investment method, An Alternative to Recurring Deposit

Let's calculate the return earned using the above investment strategy using a 91-day T-Bill with a discounted value of 98.4 per unit of 100 Rupees Face value.

Actual Interest Earned with the Discounted price of 98.4 per 100 Rupees FaceValue TBILL

Now, we have got 800 INR as interest from the T-Bills we have invested. It is better than the Recurring Deposit returns for the same 6-month tenure for general citizens. Also, in T-Bills you are stopping your monthly installment after 4th month and withdrawing your money from 5 months onwards as per the above example. However, you need to keep your money locked for 6 months for recurring deposits.

Points to remember: The Discount value may not be the same every time. It will change depending on the interest rate RBI is fixing for an auction. Every week, by Friday, RBI releases or announces the new auctions on T-Bills, and the actual allotment will be done by the following Wednesday.  One can bid on those auctions and make their payment directly from RBI's Retail Direct Gilt account. The Minimum Investment amount will be 10,000.

The above tenure is just an example, you can set whatever tenure you want and you can stop investing or keep investing as per your wish.

How safe is T-Bill Investments 

The T-Bills are backed by the Government. In India, it is backed by the Reserve Bank of India. So it more safer than our Recurring or Fixed Deposits in Banks.

How to Liquidate the T-Bills

The T-Bills will mature either by 91, 181, or 364 days. So, we need to wait until the T-Bill is matured. If you want it liquidated for your emergency needs you can sell your T-Bills in the Secondary Market (Negotiated Dealing System Order Matching - NDS OM) provided by RBI in India. Check the FAQs about NDS OM from RBI.

Advantages of T-Bills:

• It's a good option for building capital gradually with higher returns compared to Recurring Deposits.
• High safety compared to other investments
• Easy to Invest using RBI Retail Direct Gilt Account.
• No need for a Stock Broker or Demat account. No Brokerage needs to be paid if you are using an RBI retail Direct account.
• A very good option for short-term Investments
• The Yield or Interest mentioned per annum will be the same for all citizens. It won't vary for senior citizens.
• Having the advantage of re-investing your money using the above-mentioned strategy.

Disadvantages of T-Bills:

• May not be a good suit for senior citizens because other deposit options might give better returns than T-Bills.
• The Interest Earned is Taxable and will be considered as short-term capital gains.
• Not easy to Liquidate compared to Fixed or Recurring deposits.
• The Interest rate or yield will vary over time, the interest rate will be fixed depending upon the economic situation. The RBI has the right to cut down the interest rates.

Conclusion

One who wants to build the corpus by accumulating in installments with decent returns can consider the above-mentioned strategy with T-Bill investment to maximize the returns compared to other Fixed investment options.

Happy Investing!

Disclaimer: The information provided above is for knowledge and educational purposes only. thefinancefriend.in won't take any responsibility for the risk you have taken. Always consult with your financial advisor before making decisions for investments, as investments are subject to market risks.