COVID-19 has taught everyone that uncertainty can fall anytime, and you must be ready to face it financially. This has increased the need to start emergency funds for the future. Saving money, preferably saving and investing, has been an important aspect of human life.
While the urgency to get started with savings has been created, not many people in India are involved in the organised financial sector to invest or save their hard-earned money.
With the rising uncertainties of financial security, it is necessary to start saving for better returns. If you are looking for investment options, two of the most popular short-term investments include recurring deposits and chit funds.
Today, we'll discuss Recurring Deposit Vs Chit Fund and which is better for you.
Recurring Deposit (RD)
Recurring deposit offers a convenient and secure way to save money. They are a type of deposit account that allows you to make regular, fixed payments into the account over an agreed period of time. RDs are ideal for building up your savings while earning compounding interest on the deposited money.
Interest rates on recurring deposits tend to be higher than standard saving accounts due to their low-risk nature; however, they can vary depending on the bank or institution offering them.
How Does it Work?
Generally, recurring deposits have a fixed duration ranging from 6 months to 10 years. Many banks and financial institutions also allow customers to set up recurring deposits with varying amounts each month, making them flexible and easy to manage.
When investing in an RD, you will need to decide on the amount you wish to deposit and the tenure of the deposit. Once the tenure ends, your total savings and all applicable interest rate payments will be returned to you by the bank or financial institution offering the investment plan. This makes RDs an ideal option if you want predictable returns while earning some interest on your investments.
Chit Fund
Chit fund is a savings and credit system that has been around for centuries. It is an informal financial instrument used by those from low-income backgrounds or individuals who don't have access to traditional banking services.
How Does it Work?
Chit fund is organised by a group of people, each contributing a certain sum at regular intervals, usually every month. The fund organiser collects the money and allocates it among members in the form of advances as per their requirements and convenience.
The repayment of these advances is made in instalments, typically over the span of 12 months. The organiser also charges a commission for managing the chit fund, which can be between 5% to 10%. Upon completion of all repayments, all members receive the total amount saved over time, including applicable interest rates.
Recurring Deposit vs Chit Fund – What's the Difference?
Before investing in either a chit fund or a recurring deposit, it's ideal to compare the two options thoroughly. Here's a small table of comparison between RD and chit fund to help you understand the two of them better:
| Features | Recurring Deposit | Chit Fund |
|---|---|---|
| Purpose | Meant for investment only | Can be used as an investment as well as a loan |
| Type of Investment | It is safe | It can be risky |
| Guarantee | Profit is always guaranteed | Since it's risky, there's no guaranteed profit |
| Type of Return | You get a fixed return | Returns are not fixed and depend on lotteries, bidding, and distributions |
| Government Regulation | It is governed by the terms and conditions of the bank you open an RD with | The regulations are governed by The Chit Funds Act 1982 |
| Fees | There are no processing charges | The organiser must be paid between 5% to 10% of the chit fund as a commission |
| Interest Rate | It depends on your tenure and the bank | It depends on the type of chit fund you invest in |
| Taxable Income | There's no TDS, but the interest rate earned is taxable | Chit funds must be declared, but they are usually not taxable |
Recurring Deposit Vs Chit Fund: Is Chit Fund Better Than RD?
Compared to chit funds, RD is a much safer investment option, even though chit funds are government-run and registered.
Recurring deposits promise a fixed and guaranteed return when their tenure ends. So, if you're looking to invest in something risk-free, RDs are a better option.
Get started with Freo’s recurring deposit account and earn an interest rate of up to 8.7%!
FAQs
1. Can chit funds offer a guaranteed return like recurring deposits?
Investing in chit funds does not guarantee a fixed return like the RDs.
2. Chit funds or recurring deposits – which has a higher interest rate?
Currently, one of the highest interest rates on recurring deposits offered by Freo Save is up to 8.25% in India. But this can change based on the tenure and the bank you select. Compared to RDs, the rate of interest for a chit fund depends on what type of chit fund you’re investing in.
3. Which act governs chit funds in India?
According to the Chit Funds Act 1982, chit funds are governed in India.
