Know how you gain or lose by investing in systematic deposit plans

New Delhi: Unquestionably, one of the best methods to ensure a secure financial future is to save money. You start saving money by simply putting some money in a bank savings account, which can later be used for unexpected expenses or to accomplish short-term goals. With time, the savings component goes up and gives way to investing money to achieve financial goals faster.

You can achieve your financial goals more quickly and be well-prepared for a secure future by adopting a methodical and disciplined approach to saving. For saving and investing, a variety of risky and safe solutions are available. We describe a novel tool in this article called the systematic deposit plan (SDP).

How do you deposit your money systematically?

A systematic deposit plan (SDP) is a great way to invest your hard-earned money for a high rate of return. When you invest through SDP, each deposit you make is treated as a new fixed deposit (FD) that earns interest at the rate in place at the time the FD is booked. In contrast to traditional FDs, where the lump sum amount matures at a predetermined interest rate, each deposit in this case has a distinct interest rate that defines how much you may receive in returns.

If you do not have a lump sum of money to invest, then putting money in SDPs is surely the next best option. The benefit of SDPs is that you can frequently make little investments that will eventually yield a larger return. A monthly contribution to the systematic deposit plan can be as little as Rs 5000. This means that you don't need to wait months to be able to invest in an FD; you can just set away Rs 5000 every month.

How do you gain from putting money in an SDP?

One of the biggest benefits of investing through an SDP is your ability to steadily and quietly accumulate wealth. The returns you receive will depend on the interest rate in effect at the time of your deposit, but this rate will remain constant for the duration of the deposit, ensuring the security of your principal and maturity amount.

There is another reason why you must choose an SDP, which is liquidity. A deposit may be prematurely withdrawn in circumstances of extreme financial need. Because you can simply spend the money you've saved in times of need, this ensures convenience.

With an SDP, you can select a flexible duration based on your financial goals. If you're aiming to form a good saving habit, you can choose a longer term and let the money increase slowly and gradually through the force of compounding. If you just have short-term objectives, like purchasing a car, you can opt to invest for a shorter amount of time.

What are the drawbacks of an SDP?

Unlike recurring deposits, where each installment receives the same interest rate that the bank guarantees you from the outset, every new installment of the SDP will earn the then-current rate of interest. If interest rates fall more swiftly in the near future, your new installments will result in lower profits.

Furthermore, many investors tend to redeem the deposits prematurely. But in order to do so, you could have to pay a fine. In conclusion, a risk-averse investor can routinely invest from his or her monthly income using the SDP, just like a recurring deposit or a systematic investment plan. As a result, SDP gives investors who find it challenging to make large contributions all at once the opportunity to make regular investments.