About the recurring deposit calculation
A recurring deposit takes a fixed amount from you every month at a guaranteed rate. Each instalment earns interest only for the time remaining in the term, so the first deposit earns far more than the last — which is why the maturity value is well below what the same total invested at once would produce.
Formula
Modelled as a monthly-compounded annuity due:
M = PMT × ((1+i)ⁿ − 1) ÷ i × (1+i)
Note: banks conventionally compound recurring deposits QUARTERLY, which gives a slightly lower figure. On a five-year RD the difference is well under 1%.Worked example
5,000 a month at 7% for 5 years: 60 deposits totalling 300,000, maturing at roughly 358,000 — about 58,000 of interest.
Frequently asked questions
Why is an RD worth less than an FD of the same total?
Because the money arrives gradually. In a five-year RD your final deposit earns interest for a single month, while an equivalent lump sum would have earned for the full sixty. Time in the account is what generates the return.
RD or SIP?
An RD gives a guaranteed, modest return. A SIP into equity has a much higher expected return and no guarantee at all, including the possibility of loss. For goals under three years the certainty of an RD usually wins; for longer horizons the expected-return gap becomes hard to ignore.
What if I miss a monthly deposit?
Most banks charge a small penalty and some may close the account after repeated defaults. The maturity figure here assumes every instalment is paid on time.
Sources
- Annuity-due formula; quarterly-compounding variance noted above