Recurring deposits

A recurring deposit takes a fixed amount every month for a fixed term at a fixed rate. The mechanics are simple and the arithmetic reliably surprises people, so this chapter is mostly about one misunderstanding.

What an RD is for

It converts a cash flow into a lump sum. An FD needs money you already have; an RD needs money you will have. For someone saving out of a salary, that is the difference between being able to use the product and not.

At the post office, the National Savings Recurring Deposit Account runs for five years, takes a minimum of ₹100 a month with no maximum, can be prematurely closed after three years from opening, and can be extended after maturity with or without further deposits. Bank RDs offer a wider range of tenors.

Why the return feels low

Here is the misunderstanding. You pay 12 instalments of ₹10,000 at 7%, so the intuition says ₹1,20,000 earning 7% — about ₹8,400 of interest.

The actual interest is roughly half that. Not because the rate is misquoted, but because of how long each rupee was present.

Instalment	Months invested
1st	12
2nd	11
3rd	10
…	…
12th	1

The first instalment earns for a year. The last earns for a month. The average instalment is invested for about half the term.

So the quoted rate is applied correctly to each instalment for the time that instalment was actually held — and the total interest comes out near the rate applied to half the money for the full term, or equivalently the full money for half the term.

The rate is honest. The denominator in your head is wrong. You are not investing ₹1,20,000 for a year; you are investing an average balance of roughly ₹60,000 for a year.

Working the problem

₹10,000 a month for 12 months at 7%.

The rough calculation. Each instalment earns 7% a year for the months it is held, so total interest ≈ ₹10,000 × 7% × (12 + 11 + 10 + … + 1) / 12 months. The sum 12 + 11 + … + 1 is 78, so that is ₹10,000 × 0.07 × 78/12 = about ₹4,550.

Compounding (bank RDs typically compound quarterly) lifts it slightly, to roughly ₹4,600–4,700. Maturity value is therefore about ₹1,24,600, not ₹1,28,400.

Why ₹1,20,000 × 1.07 is the wrong model: it assumes the whole ₹1,20,000 was present from month one. It was not — it arrived in twelve pieces. That model would describe a lump-sum FD of ₹1,20,000, which is a different product requiring money you did not have.

The effective return on your contributions, computed properly against the timing of the cash flows, is still about 7% a year. It only looks like 3.8% (₹4,550 on ₹1,20,000) if you ignore when the money arrived — and that is precisely the error the XIRR chapter in Measuring your return exists to correct. An RD is the cleanest everyday example of why a return figure is meaningless without the timing of the cash flows attached.

RD against FD, honestly

An RD is not worse than an FD. Comparing a 12-month RD's ₹4,550 with a 12-month FD's ₹8,400 on ₹1,20,000 compares two different amounts of money-time.

The real comparison is: given that the money arrives monthly, what else could I do with it?

• Leave it in a savings account and book one FD at the end — you earn the savings rate on the accumulating balance, which is typically well below the RD rate.
• Book a small FD each month — twelve deposits, each at the rate for its remaining term, with twelve maturity dates to manage. Economically close to an RD, administratively worse.
• The RD does the same thing as one instruction, at the term rate rather than the savings rate.

So the RD wins on the thing it is for. What it is not is a way to get FD-on-the-full-amount returns out of money you do not yet have.

Small print worth knowing

Missed instalments attract a default fee and, if enough are missed, the account can be discontinued — the product assumes a reliable cash flow and penalises an unreliable one.

Premature closure is permitted at the post office after three years, with the usual consequence from chapter 2: you are re-rated, not merely penalised.

On maturity timing, the RBI direction provides that where a maturity falls on a non-business day, interest for the intervening day is paid on the maturity value for recurring and reinvestment deposits — a small detail that confirms the direction of travel: by the end, the whole accumulated sum is what is earning.

The point

A recurring deposit turns a monthly cash flow into a lump sum, which is its purpose and its advantage over waiting in a savings account. The interest looks disappointing only because each instalment is invested for less time than the one before, so the average rupee is present for about half the term — the quoted rate is applied correctly and the mental denominator is wrong. Measured against the actual timing of the contributions the return is close to the quoted rate, which is why an RD is the clearest everyday argument for computing returns with the cash-flow dates attached.