When it comes to saving and investing money, various options are available in the market. Two popular investment avenues are Recurring Deposits (RD) and Systematic Investment Plans (SIP). Both offer individuals the opportunity to grow their wealth over an extended period of time. Let’s delve into the details of RD and SIP, understand the differences between RD vs SIP, and explore the factors to consider when choosing between them.
What is SIP?
SIP or Systematic Investment Plan is a type of investment plan for mutual fund schemes. With SIP, you can deposit a small amount of money weekly, monthly or quarterly as per your convenience. As per your risk appetite, you can choose between equity or debt and your money will be allocated according to that.
To start your SIP, you must submit the SIP application form and bank ECS mandate. Through this ECS mandate, the SIP amount is automatically debited from your bank as per the frequency that you have specified in the scheme of your choice. The minimum SIP amount generally ranges around ₹500 to ₹1000.
What RD?
Recurring Deposit (RD) is a financial product offered by banks and other financial institutions. It is a periodic deposit plan that allows individuals to deposit a fixed amount of money at regular intervals, usually monthly, for a predetermined period.
RDs are similar to fixed deposits but differ in how contributions are made. The interest earned in both cases are same if the tenure of investment is the same. RDs are generally gentle on your pocket as they are primarily designed for saving money regularly for a particular tenure and earning interest on them without much risk.
The tenure for this deposit generally ranges between 6 months to 10 years. The interest that you will earn on your deposit depends on the investment duration and the amount you invest. Senior citizens usually receive a higher rate of interest than general people. The minimum investment for this scheme is as low as ₹100. Interest income that you earn from recurring deposits is taxable.
Difference Between SIP & RD
If you are planning to build your corpus significantly, you can choose between SIP vs recurring deposit. However, you need to know the differences between SIP and RD before that so as to choose the one which is suitable for you. Following is a tabular representation of how you can differentiate between SIP and recurring deposit:
| Parameters | SIP (Systematic Invest Plan) | RD (Recurring Deposit) |
|---|---|---|
| Definition | A type of investment plan that lets you invest a fixed amount in regular intervals in the mutual fund scheme of your choice. | Recurring deposit is one of the most risk-free investment options. When the scheme matures, you get a guarantee of receiving the principal and interest payments. |
| Investment Scheme | Depending on your risk capacity, you can choose to invest between Equity and Debt mutual funds. | In the case of recurring deposits, you can choose to invest between fixed and flexible schemes. |
| Returns | Returns you earn are not guaranteed and depend on the performance of the mutual fund that you are investing in. | RDs come with fixed interest rates. Special rates are applicable for senior citizens. |
| Risk Factor | Your risk will be high or low according to the mutual fund scheme you choose. Market-linked risk is also an important factor. There is no guarantee of capital protection. | Recurring deposit is one of the most risk-free investment options. When the scheme matures, you get a guarantee of receiving the principal and interest payment. |
| Investment Goal | SIPs are apt for fulfilling both long-term and short-term goals. However, the returns depend on the funds that you choose, the frequency of investment, etc. | Recurring deposit does not have any long-term wealth growth prospects. Therefore, they only fulfil short-term financial goals. |
| Instalment Frequency | SIPs come with flexible instalment plans that range around daily, weekly, monthly, and quarterly. | RDs generally come with a monthly instalment option. |
| Taxation | SIPs are taxed as short-term capital gains or long-term capital gains. However, the returns are tax-exempt if you invest in ELSS funds. | Interest that you earn from RDs is taxed as per your income tax. |
| Liquidity | SIPs are highly liquid. You can close your SIP at any moment and withdraw your money. However, an exit load might be applicable. | Recurring Deposits are also liquid; however, you will have to bear a penalty in case of premature withdrawal. |
| Suitable For | SIPs are suitable for both conservative and aggressive investors. | RDs are suitable for conservative investors. |
Benefits of SIP
SIPs have several benefits that make them a popular investment choice. Some key benefits of SIPs include:
1. Rupee Cost Averaging
Rupee cost averaging is a method in which you purchase more units when the Net Asset Value of a fund is lower and vice versa. This helps in averaging out the cost of investment over time.
2. Disciplined Savings
Systematic Investment Plans offer a disciplined approach for you to set aside a fixed amount on a regular basis. This offers the dual benefit of developing a habit of saving money and growing your money over time to beat inflation.
3. Flexibility
SIP offers tremendous flexibility. Investors can conveniently start, stop, increase, or decrease SIP contributions, providing flexibility in managing investments. This flexibility helps individuals to tailor their investments to their financial needs and goals. There is no limit to the number of mutual funds you can invest at the same time.
4. Diversification
As the adage goes, ‘Do not put all your eggs in one basket’ SIPs offer the option of investing in a diversified portfolio of securities. You can invest in a variety of stocks and bonds, which will ultimately help reduce the risk of losses caused by market volatility.
5. Potential for Higher Returns
If you compare the potential of returns between RD vs SIP, you will see that SIPs can generate higher returns than traditional investment options over the long term. This might be of great help when it comes to beating inflated costs.
6. Professional Fund Management
SIPs allow investors to benefit from the professional fund management that experienced fund managers provide. This helps investors make informed investment decisions and reach their financial goals.
7. Convenient Investment Technique
SIPs are simple to set up and manage. It is apt for people who do not have time for extensive market research. SIP allows investment amounts to be deducted automatically from a bank account as per the frequency set. Therefore, once you choose a good fund, you do not have to worry about making manual investments.
8. Power of Compounding
By investing regularly through SIP, your returns get reinvested. With time, the potential of returns increases multiple times. Rather than making a one-time investment, you can make better use of the power of compounding by investing smaller amounts for a longer tenure. Therefore, investing for an extended period is the best way to maximise your gains.
9. Cost Effective
SIPs are cost-effective as you can invest a small amount over a long tenure. Even the management fees will be spread across a longer period. This reduces the impact of the fees on the overall impact.
Benefits of RD
RDs offer several benefits that make them attractive to conservative investors. Some key benefits of RDs include:
1. Easy Investment
Anyone with a bank account can invest in an RD. Some banks even permit standing instructions online for automatically depositing money, further simplifying the process.
2. Senior Citizen Benefits
Like any other bank investment, RDs offer higher interest returns for senior citizens compared to what the general public receives.
3. Low-Risk Savings
Unlike investment products like stocks or mutual funds, RDs are completely risk-free and safe. As the rates are unaffected by market fluctuations, you receive assured returns at the end of your investment tenure.
4. Flexible Tenure
RDs typically have a tenure ranging from 6 months to 10 years, allowing investors to choose a duration that suits their financial goals. Therefore you can choose to invest for a tenure that fulfils your financial goals.
5. Lucrative Returns
RDs earn interest, usually higher than regular savings accounts, helping investors grow their savings over time.
6. No Limit on Numbers of RDs
As there is no limit on the number of recurring deposit accounts you can hold at a time, therefore you can open as many RDs as you want.
7. Loan Facility
RDs often come with the option of availing loans against the deposit amount, providing liquidity in times of need. Generally, the maximum amount of loan that you can avail is up to 90% of the investment amount.
RD vs SIP – Make Expert Option?
Selecting the right investment option depends on various factors. Consider the following aspects to make an informed decision about SIP or RD which is better:
1. Risk Tolerance and Financial Goals
Assess your risk appetite and determine the purpose of your investment before choosing an investment scheme. If your goal is to save for the short term, then RDs might be worth it. And in case you are planning for long-term wealth creation, SIPs might be a good fit.
2. Diversification and Portfolio Allocation
Evaluate your existing investments and consider diversifying your portfolio to balance risk and potential returns.
3. Professional Advice and Research
Seek guidance from a financial advisor or conduct thorough research to understand the nuances of RDs, SIPs, and their suitability to meet your financial goals.
4. Consider your Taxable Income
If you belong to a low-tax bracket, then RD might be your best fit, as the interest income that you earn will be taxable. If you want to save on tax payments, you can opt for ELSS, which might be a perfect fit in this case.
Conclusion
RD and SIP offer unique advantages and cater to different investment needs. RD is suitable for individuals seeking low-risk investments with assured returns for short-term goals. On the other hand, SIP provides the opportunity for higher returns over the long term but carries market-related risks. When choosing RD vs. SIP, evaluating factors such as investment horizon, risk appetite, flexibility, returns, and tax implications is essential to ensure that you meet your financial goals.
Remember, it’s advisable to consult a financial advisor before making any investment decisions to align with your financial goals and risk profile.
FAQs
Yes, you can invest in both RD and SIP simultaneously to diversify your investment portfolio and cater to different financial goals.
Missing an RD or SIP instalment may attract penalties or charges. It’s important to stay disciplined and regularly contribute to avoiding negative consequences.
RDs have fixed investment amounts, and modifications are not possible. SIPs offer flexibility in adjusting the investment amount based on your financial capability.
RDs may impose penalties for premature withdrawal, resulting in a reduction in the interest earned. SIPs do not have any penalties for premature withdrawal.
RDs typically do not offer a switch facility between different schemes. SIPs, however, allow investors to switch between different mutual funds based on their investment preferences and performance outlook.
Disclaimer
This article is solely for educational purposes. Stable Money doesn't take any responsibility for the information or claims made in the blog.
