Recurring Deposits vs. Debt Funds: Differences and which is better?

If you're looking for a steady way to grow your money, you are likely to have heard of the terms Recurring Deposits (RD) and Debt Funds. Both are popular in India and often chosen by people who want regular savings without taking too much risk. But the question remains; which one should you pick?
In this article, we’ll take a closer look at what debt funds are, what an RD is, how the two are different, their risks and benefits, and finally, how to decide which is better for your needs.

• Table of contents

• What are debt funds?
• What is an RD?
• Difference between Debt Funds and RD
• Risks of investing in Debt Funds
• Risks of investing in a Recurring Deposit
• RD vs. Debt Funds: Which is better?

What are debt funds?

Debt funds are a type of mutual fund that mainly invest in fixed income instruments like:

• Government bonds
• Corporate bonds
• Treasury bills
• Commercial papers

These funds earn income in the form of interest. Because they don’t invest in the stock market (or only a very small part), they are considered less risky than equity mutual funds.
They can be suitable for conservative investors who want relatively stable returns without too much market volatility. Debt funds come in various types, such as liquid funds, short-term funds, and gilt funds, each suited for different investment durations and risk levels.

Key points:

• Good for short to medium-term goals
• Relatively better returns than fixed deposits in some cases
• Slightly higher risk compared to RDs or FDs
• Easy to start with SIPs (Systematic Investment Plans)

Debt funds are managed by professional fund managers, so you don’t have to do much apart from choosing a good fund and investing regularly. You can also redeem your investment partly or fully at any time, making it a flexible option for emergencies.

Read Also: SIP vs. Recurring Deposit: Key Differences and Which is Better?

What is an RD?

RD, or Recurring Deposit, is a simple saving tool offered by banks and post offices. You deposit a fixed amount every month, and at the end of the term, you get your money back along with the interest earned.

It’s like a disciplined savings habit where you commit to saving a small amount regularly. The interest rate is decided at the time of opening the RD and remains the same throughout the tenure. Most RDs have flexible durations, usually ranging from 6 months to 10 years, and are easy to open online or at your nearest bank branch.

Key points:

• Very low risk (almost zero)
• Fixed interest rate (set by the bank)
• Ideal for people who want assured returns
• Can start with as low as Rs. 100 per month

Recurring Deposits are a favourite among people who want to save for short-term goals like festivals, school fees, or a small trip without taking too much risks. They are also suitbale for first-time savers or those who are not ready to take any financial risks.

Difference between Debt Funds and RD

Let’s look at the main differences between RD vs. Debt Funds:

Risks of investing in Debt Funds

Debt funds are less risky than equity funds, but they do come with some risks:

• Interest rate risk: If interest rates rise, the value of your debt fund may fall.
• Credit risk: If the bond issuer (like a company) fails to pay, the fund may lose money.
• Market fluctuations: Debt fund values can go up and down based on market conditions.

However, these risks are not necessarily a point of significant concern. If you choose a good quality fund and stay invested for some time, the risk is quite low. Still, it is important to remember that debt funds are not 100% risk-free.

Risks of investing in a Recurring Deposit

RDs are relatively stable, but they also have a few minor downsides:

• Low returns: Usually lower than inflation, so your money might not grow much in real terms.
• Tax on interest: The interest you earn is fully taxable under your income slab.
• Fixed structure: You cannot increase or decrease your monthly amount once you start.
• Penalty for early withdrawal: If you close your RD before maturity, you may get less interest or face charges.

So, while RDs can be suitable for peace of mind, they don’t offer much growth.

Read Also: Fixed Deposit vs SIP: Meaning, Benefits, and Which is Right for You?

RD vs. Debt Funds: Which is better?

This is the big question for all investors. RD vs. Debt Funds: Which is better?

Here’s a simple way to answer it.

Choose an RD if:

• You want returns with minimum risk
• You are saving for a short-term need
• You’re not comfortable with any kind of market risk. You don’t want to track or manage your investment

Choose a debt fund if:

• You can handle some risk for potentially better returns
• You’re investing for short to medium term (1–5 years)
• You want more flexibility
• You’re comfortable using investment platforms or apps

If you’re saving for goals like a wedding, vacation, or building an emergency fund, debt funds could give relatively better returns. But if you’re someone who doesn’t want to think about market ups and downs at all, an RD may be a preferred choice. Many financial planners suggest mixing both: use RDs for assured savings and debt funds for higher growth.

Conclusion

Both RD and debt funds are useful tools to grow your money. It all depends on what kind of investor you are. If you want peace of mind, go with RDs. If you are looking for better returns with some flexibility, try debt funds. There’s no one right answer. Your age, income, risk level, and goal will help you decide what suits you. Moreover, the potential to create a steady post-retirement income stream from your debt fund investments can be easily estimated by using an online SWP calculator. Once you understand the differences between RD vs. Debt Funds, you can make an informed choice.

FAQs

Which is better, RD or mutual fund?

It depends. RDs offer fixed, stable returns. Mutual funds, especially debt funds, can give higher returns but involve some risk. For stability, choose RD. For potentially better growth, try mutual funds.

What is the difference between RD and SIP in debt funds?

RD is a fixed deposit with assured interest, while SIP in debt funds is a way to invest regularly in mutual funds that invest in bonds. SIPs have flexible amounts and returns that depend on the market.

What are the disadvantages of RD?

The main drawbacks of an RD are lower returns, fully taxable interest, fixed monthly payment (no flexibility), and penalties for early withdrawal.

Is a debt mutual fund good?

Yes, debt funds are a good option if you want relatively better returns than fixed deposits and can take a little risk. They work well for short to medium-term goals and offer more flexibility than traditional deposits. However, unlike FDs or RDs, returns from mutual funds are not guaranteed.

How do I avoid tax on RD?

Unfortunately, you can’t completely avoid tax on RD interest. It is fully taxable under your income tax slab. However, if your total income is below the taxable limit, you can submit Form 15G/15H to avoid TDS.

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