SIP Vs Recurring Deposit – Which is Better

Systematic Investment Plans and Recurring Deposits are popular financial instruments among investors who want to create wealth over a long period. With both SIP and RD, you can set aside a percentage of your monthly income and earn a good return on it to achieve your financial goals.

Understanding Systematic Investment Plan

With SIP, you can invest in mutual funds at fixed regular intervals with as little as Rs. 500. Depending on your risk appetite, you can choose to invest in equity, debt, or hybrid funds. Additionally, several sources highlight that SIP generates as high as 12% to 22% returns p.a. over a long period, which is higher than the returns on a Recurring Deposit. Investing in SIP also guards you against the risk of market volatility as you spread your investment across multiple stocks. 

Understanding Recurring Deposit

A Recurring Deposit is an investment scheme that helps you save for your future. Financial institutions offer RD as a term deposit where you can choose the tenure and the monthly investment amount. Usually, the tenure of RD ranges between 6 months and 10 years, with interest rates varying from 5% to 9%. In India, RD is a popular investment tool, as it offers a fixed rate of interest and is risk free. On the maturity of your RD, you will receive the lump sum amount along with the interest. 

Difference Between SIP and RD

Now that you have understood the meaning and difference between SIP and RD, let's look at the different parameters that you should evaluate to choose the investment plan that suits your requirements.

• Type of investment scheme

SIP gives you the option to invest in different types of mutual funds based on your income and risk appetite. An RD does not give you multiple investment options and has a fixed interest rate. 

• Risk Involved

As SIPs are directly linked to the market, they can be volatile. However, you can offset this risk by investing for a long-term. RDs, on the other hand, are safer and unaffected by market volatility. 

• Frequency of investment

SIP allows you to make weekly, monthly, or quarterly investments based on your choice. RD does not offer flexibility in the frequency of investment and requires a fixed monthly deposits.

• Liquidity

You can withdraw money from SIP without any exit load after one year of investment. However, to close an RD before its maturity, you will have to bear pre-withdrawal charges. 

• Taxation

With SIP, you can enjoy tax benefits under Section 80C by investing in ELSS funds. However, RD is not tax efficient, as you will have to pay taxes on the returns depending on the applicable tax slab.

• Suitability

SIP is suitable for conservative as well as aggressive investors. But RD is more suitable for risk-averse investors.

• Investment objectives

SIP is ideal for meeting both your short and long-term goals. RD does not contribute toward wealth creation in the long-term and is more suitable for meeting short-term goals.

SIP vs RD: Which is better?

When deciding where to invest between  Systematic Investment Plans and Recurring Deposits, the two key considerations for most individuals are the potential risk and expected returns.

While SIPs are better suited for investors with varying risk profiles, they do carry some risk. In contrast, RD is a highly secure investment option.

In terms of returns, RDs provide a fixed income based on the interest rates set by banks. SIP returns, however, are variable and influenced by market performance and the types of securities in the portfolio.

For investors who prefer a low-risk approach, recurring deposits are ideal. On the other hand, mutual fund SIPs can suit both cautious and risk-taking investors, offering flexibility based on individual risk preferences.

It's essential for investors to evaluate their financial goals and risk tolerance before deciding between SIPs and RD. This self-assessment will allow them to make more informed investment decisions.

To conclude

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FAQs

What are the returns offered in an SIP?

The returns in a Systematic Investment Plan (SIP) vary based on the mutual fund's market performance and the securities it holds. Unlike recurring deposits, SIP returns are not fixed and are influenced by market fluctuations.

What is a Systematic Investment Plan?

A Systematic Investment Plan (SIP) allows investors to invest regularly in mutual funds in small, fixed amounts over time. It helps in disciplined investing and benefits from rupee cost averaging and compounding returns.

What are the risks associated with an SIP and an RD

SIPs carry market-related risks, as returns fluctuate with the market's performance. Recurring Deposits (RDs), on the other hand, are typically risk-free, offering fixed returns determined by the bank's interest rates.

Is an SIP better than an RD in terms of liquidity?

SIPs typically offer higher liquidity compared to RDs, as investors can redeem their mutual fund units anytime. RDs require you to wait until maturity or pay a penalty for premature withdrawals.