I regularly invest in Recurring Deposits. I want to explore alternative methods to save money that offer higher returns 

I often find myself faced with the challenge of making large payments for insurances and vehicle services a couple of times each year. During these months, I notice that my available liquid cash diminishes significantly post-payment. In order to alleviate this financial strain, I have devised a strategy to save money each month over a span of 6-12 months leading up to these payment deadlines. To execute this plan, I have initiated separate Recurring Deposits (RDs) for these specific expenditures.

For instance, I am required to make a bi-annual payment of 15k to LIC. As a test run, six months ago I opted to save half of this amount in an RD by setting aside 1200 each month. The other half I invested in NIFTYBEES by making an additional payment of 1200 above my regular investments, with the intention of withdrawing the necessary funds at the end of the 6-month term. Unfortunately, due to the current market downturn, selling the NIFTYBEES units would result in a loss, whereas the money in the RD remains secure, albeit with a meager yield of only Rs 126 over the same 6-month period. I have achieved the intended purpose and prioritising profit is not a concern. I am interested in exploring alternative methods to save this money that offer safety and higher returns than a Recurring Deposit (RD).

Advice by Rajani Tandale, Senior Vice President, Mutual Fund at 1 Finance

Instead of keeping your short-term savings in a Recurring Deposit (RD), you can consider Arbitrage or Liquid Mutual Funds, which generally offer better returns of around 5-6% while keeping your money safe and accessible. Arbitrage Funds are a good option if you are in a higher tax bracket since they are taxed like equity, with lower tax rates if held for over a year. 

On the other hand, Liquid Funds are taxed as per your income slab and are more suitable if you fall into a lower tax bracket. You can easily automate your savings by setting up an SIP in these funds, just like an RD. However, be mindful that Arbitrage Funds may have an exit load for 1-3 months, so it's advisable to keep a small buffer to avoid charges. Avoid investing in NIFTYBEES or direct equities for short-term needs, as market fluctuations can lead to unexpected losses when you need the money. 

Additionally, since you're making LIC payments, it's a good idea to review your policy’s actual returns. Many traditional LIC plans offer only 4-5% returns, which may not be the best option for wealth growth. You can use the 1 Finance Surrender Calculator to check if continuing your LIC policy is financially beneficial. Making these small changes can help you optimize your short-term savings while ensuring better returns without unnecessary risk. Let me know if you need help setting this up!

What is a Recurring Deposit?

A recurring deposit (RD) is a type of deposit account that enables individuals to invest a set amount of money at regular intervals, typically monthly. It is a popular method for saving money and accruing interest over a predetermined time frame.

In this deposit scheme, investors can contribute a fixed sum of money at consistent intervals for a specified duration. RDs are particularly suitable for individuals who may not have a lump sum available for traditional fixed deposits. The tenure of an RD can range from a few months to several years, and it offers interest on the deposited amount, typically at a lower rate compared to fixed deposits (FDs).

Some RDs also provide flexibility in choosing the tenure according to one's financial objectives. Many banks offer an automatic renewal option, allowing investors to reinvest the matured RD amount.

The fixed deposit tenure ranges from seven days to 10 years, while the recurring deposit tenure spans from six months to 10 years.

Interest rates for fixed deposits vary between 3% and 7%, and for recurring deposits, they range from 3.50% to 8.50%.

A fixed deposit involves a one-time deposit, whereas a recurring deposit requires monthly contributions.

With fixed deposits, you have the option to receive interest regularly (monthly, quarterly, or semi-annually) or upon maturity. Recurring deposits do not offer regular interest payments and only mature at the end of the term.

For fixed deposits, individuals have the flexibility to reinvest the principal or principal + interest, while this is not typically an option for recurring deposits.