Why Investing in a Bank Recurring Deposit will make you Poor!

Recurring Deposit(RD) is a special kind of Term Deposit offered by banks in India which help people with regular incomes to deposit a fixed amount every month into their Recurring Deposit account and earn fixed interest rate.

We all invest in RDs but here are the reasons why we should not invest in RDs for long term.

1. Inflation eats your returns.
Inlation Eats your returns
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Long term inflation in India is 10% (CPI). So if your RD is of 9%, effectively you are losing 1% every year because of inflation. RD is giving NEGATIVE returns when accounted for INFLATION.

2. Low Post Tax Returns.
Low Post Tax Returns
Interest on RDs are added to your income and taxed according to your tax bracket. This brings down the NET returns to the investors.

3. Falling Interest Rates.
From a very long term perspective, Interest rates in developing economies keep falling. So if you are able to make an RD of 10% today probably 10 years down the line you would get lower than that, say 6%.
Example: PPF was giving 12% returns in the year 2000 and it has fallen to 8.7% and it would continue to fall further as economy develops.

Best Alternative: SIPs in Equity Mutual Funds.
SIPs are better than RDs
If you are a long term investor, investing in EQUITY Mutual Funds is the best option. Here is a comparison between 10% RD and an equity mutual fund.
The numbers are real, only the name of the fund is not disclosed.

Going ahead, be cautious while investing!! Consult a Wealth Manager, if you are not aware of options.