In India, many people invest their money in either bank fixed deposits or mutual funds. Specifically, recurring deposits (RDs) and systematic investment plans (SIPs) are investment options that use your regular savings to build wealth. A lot of investors choose to use both RDs and SIPs. In this article, we will compare these two programs, SIP vs. RD, to help you make well-informed investment decisions.
Recurring Deposits
With a Recurring Deposits, you pick a time frame and the monthly deposit amount. Once the plan starts, you need to deposit this amount each month for the duration you’ve chosen. Generally, you can select a term of six months to ten years. Recurring deposits are budget-friendly because you can set the schedule, and they come with low risk.
Systematic Investment Plan
SIPs allow you to invest in mutual funds by contributing a small sum of money every month or quarter, which can be as low as Rs 500. Professional fund managers then allocate your money into either debt or equity investments based on your chosen scheme. When it comes to returns, equity mutual funds tend to outperform recurring deposits and fixed deposit plans
| Difference Between Recurring Deposit and SIP | Recurring Deposit (RD) | Systematic Investment Plan (SIP) |
| Investment Scheme | In an RD scheme, you must invest in a deposit plan that provides a fixed rate of return. If you want more freedom, you can also choose a flexible recurring deposit programme. | You can choose between debt and equity funds in a mutual fund SIP based on your risk tolerance. |
| Risk Factor | Recurring Deposits are one of the most risk-free forms of investment. | The returns from the SIP are vary. Depending on the stock market, there may be capital and return risk. However, recent data shows that if held over a long period of time, SIPs provide good returns. |
| Investment Type | The investor must deposit a predetermined sum every month in a recurring deposit arrangement. | A Systematic Investment Plan is a method of investing in mutual funds. Investing can be done on a daily, weekly, monthly, or quarterly basis. |
| Returns | Because the interest rate in a recurring deposit scheme is predetermined, the return is also fixed and known at the time of investment. | The returns from a mutual fund SIP are determined by the debt and equity markets, as well as the fund plan chosen by the investor. |
| Liquidity | Although recurring deposits are liquid, early withdrawal or closure will result in penalties. | When it comes to liquidity, a SIP outperforms RD. The SIP can be terminated, and the funds withdrawn without penalty. |
| Taxation | The amount of the recurring deposit or the interest gained on it are not tax-free. | Only when invested in Equity Linked Savings Scheme (ELSS) are funds for SIP investments and returns tax-free. |
| Instalment Frequency | Recurring Deposits are often paid in monthly installments. | SIPs provide flexible instalment schemes such as daily, weekly, monthly, quarterly, and so on. |
| Investment Goal | Recurring Deposits are typically used for short-term savings and do not contribute to long-term asset creation. | SIPs can assist with all types of financial goals, whether short- or long-term, based on the frequency of investment, funds selected, and other considerations. |
RD vs. SIP: Which One to Choose?
Systematic Investment Plans and recurring deposits are both popular tools for building wealth. However, when deciding where to invest, most people consider two critical factors: the level of risk and the potential returns.
RDs are a highly secure investment option with minimal risk. In contrast, SIP investments carry some level of risk. However, mutual fund SIPs can cater to individuals with varying risk profiles.
In terms of returns, RDs offer a fixed income based on the interest rate set by banks. SIP income, on the other hand, is not predetermined and varies depending on market conditions, types of securities invested in, and more.
A recurring deposit is a good fit for conservative investors who prefer low-risk options. Mutual fund SIPs are versatile and can suit both conservative and aggressive investors, making them suitable for individuals with different risk appetites.
Before choosing between SIP and RD, investors should first identify their investment objectives and risk tolerance. This will help them make informed investment decisions. Additionally, tools like Monexo SIP Calculator can aid in planning and calculating future returns.
Summary
We’ve compared how recurring deposits (RDs) and systematic investment plans (SIPs) work and which might be the better choice. While they share some similarities, there are key distinctions between RDs and SIPs, primarily in terms of risk and returns. RDs offer a safe investment option, while SIPs are exposed to market volatility. Mutual fund SIPs have the potential for higher returns compared to RDs and also offer significant tax benefits. So, the answer to whether SIP or RD is superior depends on your specific financial goals and risk preferences.
