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Which is Better SIP Or RD?

17 March 2022

Systematic Investment Plans and recurring deposits are two popular ways in India for wealth creation over a longer period. While SIP involves setting up a fixed amount at fixed intervals for investment in mutual fund schemes, RD is a savings scheme requiring monthly payments.

Those looking to build a significant corpus through payments at regular intervals can opt for either RD or SIP. The following sections include an analysis of SIP vs RD to help individuals choose the most preferred option. 

Difference between SIP and RD

Here is a tabular representation laying out the various differences between a recurring deposit and a Systematic Investment Plan

Parameters Systematic Investment Plan Recurring Deposit
Investment type Individuals invest their money in a mutual fund scheme at fixed intervals such as quarterly, monthly, or semi-annually. Investors will have to pay a certain amount each month.
Returns The mutual funds SIP returns have been varying between 12% and 22% for the past 5 to 10 years. Note that the returns are not guaranteed.  The interest rates have varied between 5% and 9%. There are special rates applicable for senior citizens. Returns are fixed because RDs come with fixed interest rates.
Tenure SIPs do not have any specific tenure.  The maturity period of RDs lies anywhere between six months and 10 years.
Scheme Investors have the option to invest in equity or debt funds based on their investment objectives and risk-bearing capacity. Those looking for flexibility can opt for flexible RDs. 
Risk The risks associated with SIPs will depend on the type of mutual fund one picks and on the overall market condition. However, one can avert such risks by investing over a longer period. This is one of the safest options for investment. There is practically no risk involved with recurring deposits.
Taxation Taxation is applicable on one’s STCG and LTCG.  Income received from recurring deposits is not eligible for tax exemption or deduction. The earnings are taxed as per the tax slab applicable for the individual. 
Liquidity SIP offers comparatively better liquidity. One can close an SIP and withdraw money anytime. However, they may have to pay an exit load if they redeem the units before a specific period.  Recurring deposits also provide liquidity, but it involves payment of pre-withdrawal charges for premature withdrawals.
Suitable for This is suitable for both conservative and aggressive investors.  This is most suitable for conservative investors.

SIP or RD: Which one to Choose? 

Systematic Investment Plans and recurring deposits are quite popular instruments for wealth creation. The two most significant factors that individuals usually check before investing their money are risk factors and returns generated. 

While RDs are a highly secure investment option, there will be some risks associated with SIP investments. That said, mutual fund SIPs can easily cater to individuals with varying risk profiles. 

In terms of returns, RDs generate a fixed income as per the interest rate which the banks decide. Income from SIP will vary as the returns are not fixed and usually depend on the market conditions, types of securities invested in, etc. 

A recurring deposit would be ideal for conservative investors who are not keen on taking risks. On the other hand, a mutual fund SIP can be a viable option for both conservative and aggressive investors as it is designed for investors with different risk appetites. 

However, before choosing between SIP and RD, investors need to be aware of their investment objectives and risk appetite. This will help them to make an informed choice. 

Final Word

The comparative analysis of SIP vs RD will help individuals to confidently choose an investment option that will help them to fulfil their financial goals. 

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