Recurring Deposit (RD)

A common point of confusion is comparing a Fixed Deposit (FD) to a Recurring Deposit (RD). If you invest ₹1.2 Lakhs as a lumpsum in an FD at 7% for one year, you will earn significantly more interest than if you invest ₹10,000 per month in an RD at 7% for one year.

In an FD, your entire ₹1.2 Lakhs is sitting in the bank earning interest for all 12 months.

In an RD, only your first ₹10,000 earns interest for 12 months. Your second ₹10,000 only earns interest for 11 months. Your final ₹10,000 deposit only earns interest for a single month!

Because capital is drip-fed into the account, the "average time in the market" for your money is roughly half that of a lumpsum FD.

Because of this stepped timeline, banks calculate RD interest using a specialized formula based on the sum of an arithmetic progression of months:

Maturity = P × [ (1 + r/n)^(n×t) - 1 ] / [ 1 - (1 + r/n)^(-1/3) ]

Note: This specific mathematical formula varies slightly depending on if the bank compounds quarterly (as is standard in India) or monthly.

RDs are not mathematically designed to beat lumpsum returns; they are a behavioral forced-saving mechanism designed to build discipline for people who earn monthly salaries.