Setting aside a fixed amount of money every month specifically for savings or investment is the best way to create wealth in the long run without much effort.

Systematic Investment Plan (SIP) in Mutual Funds and Recurring Deposits (RD) in banks are the two most popular ways in India which serve this purpose of long-term wealth creation.

But which one is better? SIP or RD?

Let’s look at the main difference between these two investment instruments?

Systematic Investment Plan (SIP) Vs Recurring Deposit (RD)

Factors Systematic Investment Plan (SIP) Recurring Deposit (RD)
Investment Scheme SIP is an organized way of investing regularly in a mutual fund. In an RD scheme, you will have to invest in a deposit plan that will give you a fixed rate of returns. Almost every bank offers to regulate recurring deposit monthly.
Investment choice In SIP, you can choose among various types of mutual fund schemes. You can invest in equity or debt schemes based on your risk appetite. You can also choose a flexible RD scheme, if you are looking for more flexibility.
Investment tenure There is no fixed tenor for an SIP. Investors can do it for any period. RD has a maturity date. The minimum tenure is 6 months, while investors can opt for an RD for a maximum of 10 years.
Returns on Investment Returns on SIP are not fixed as they depend on the mutual fund scheme selected and are market-linked. In the last 10 years, equity oriented mutual fund has generated a return of around 12%-16% p.a. and debt mutual fund has given a return of around 7%-9% p.a. Returns on RDs are fixed and are known to investors at the time starting an RD. Indian banks offer returns of around 6%-7% p.a.
The frequency of investment Investors can invest a small amount through SIP on a weekly, monthly and quarterly basis. In RD, investors can only invest a fixed amount on a monthly basis.
Risk Factor The risk associated with SIP depends on mutual funds and are subjected to market conditions. But the risk associated with the SIP can be minimized if held for a long period of time. Recurring Deposits are one of the safest investment options and are best for risk-averse investors.
Liquidity In terms of liquidity, a SIP is better when compared to RD. SIP can be closed and the money can be withdrawn anytime, however, Investors have to bear exit load if they are redeeming before 1 year (for equity-oriented mutual funds mainly). RD is also liquid in nature. However, an investor has to pay pre-withdrawal charges for making any early withdrawals.
Taxation SIP investments and returns are exempted from tax only when invested on Equity Linked Savings Scheme (ELSS) mutual funds. RD amount or the interest earned on it are not exempted from tax.
Investment Goal SIPs is for all kind of investment goals whether short -term or long – term goals, depending on the frequency of investment, risk appetite, conservative approach or aggressive approach and other factors. You just need to choose the right mutual fund scheme which suits your investment goal. RD is mainly for investors who are risk averse in nature and have short term investment goal.

So now you know the differences, you can definitely choose which one suits better for your investment goal.

But remember that investors should do investments in order to allow their investments to grow and generate better returns while considering their risk appetite.

Happy Investing!

Discalimer: The views expressed in this post are that of the author and not those of Groww