Financial planning plays an important role in today’s time. For your money to grow into wealth, it is required that you invest it in good avenues. Many individuals set aside a fixed amount every month for investment purpose. The two most popular investment avenues for investing a fixed sum of money every month are Systematic Investment Program (SIP) in Mutual Funds and Recurring Deposits (RD). In this article, you will learn about the difference between RD and SIP.
Let us begin by learning the meaning of the two terms.
What is SIP?
Systematic Investment Plan or SIP is an investment scheme where you can invest a fixed sum of money on a monthly or quarterly basis. It is a disciplined approach of investing your money because you set aside a fixed amount of money for investment purposes. You can start SIP by selecting a mutual fund scheme. The best part of SIP is that you can start it with an amount as low as Rs. 500.
Let us now learn the meaning of recurring deposit.
What is Recurring Deposit?
Recurring Deposit or RD is a term deposit scheme offered by the banks. In this scheme, you have to select the duration of time and amount of monthly deposit. Upon the start of the plan, you have to deposit a fixed amount of money every month during the tenure of the scheme. In general, the duration of the scheme is minimum 6 months and on completion, 3 months of addition can be made up to maximum tenure of 10 years. Recurring deposit schemes are easy on the pocket because in this scheme you get the option to select the amount and tenure for which you want to continue the scheme.
Let us now learn about the SIP vs. RD.
SIP is about investing in mutual fund plans where you have the option to select between debt or equity funds on the basis of your risk-taking capability. Whereas, RD is a deposit scheme that can give you a fixed rate of returns. If you are looking for more flexibility than you can opt for a flexible recurring deposit scheme.
SIP can be started with a small amount. It is your choice to invest in SIP on a weekly, monthly and quarterly basis. In the case of recurring deposits, you can invest a fixed amount on a monthly basis.
SIP gives you the option to invest as per your risk appetite. Based on your risk-taking capability you can invest in different mutual fund schemes like equity, debt, hybrid, etc. On the other hand, a recurring deposit has no investment options. To earn a fixed return, you have to invest a fixed amount of money on a monthly basis.
You can opt for SIP investment for any tenure or duration of time. The minimum period of investment is 6 months. Whereas, in the case of recurring deposits, they have a fixed maturity date. The minimum period of investment is for 6 months and the maximum period up to which you can do a recurring deposit is 10 years.
The rate of return in SIP is not fixed because their performance is linked to the market. In general, over the past 10 years, the equity mutual funds have given return of 12% to 14% per annum and debt mutual funds have given a return of 8% to 9% per annum. On the other hand, when you start investing in RD, the rate of return is already known to you.
SIP is highly liquid in nature i.e. they can be withdrawn whenever you want. However, you must remember that you would be charged an exit load on redeeming within 1 year of investment. Just like SIP, RD is also liquid in nature. RD attracts pre-withdrawal charges in case you make a withdrawal before the end of the tenure.
Investing in mutual funds is risky because the performance of the fund is dependent on market performance. Poor market performance can even lead to capital erosion. However, in comparison to the equity mutual funds, the debt mutual funds are less risky. On the other hand, RD is a safe investment option. This is because the funds are directly deposited into the bank and they have a fixed rate of return. Hence there is no risk of capital loss in RD.
The SIP investments and returns generated on it are exempt from tax only if the investment is made in Equity Linked Savings Scheme (ELSS) funds. Whereas, an investment made in the form of recurring deposit or interest earned on it is not exempt from tax.
SIP acts as a one-stop solution to all types of investment goals. In SIP, depending on the frequency of your investment and funds selected, you can invest for short, medium or long term. On the other hand, RD investment, in general, is done for short term purposes. It cannot generate wealth like SIP.
The above mentioned are a few differences between the SIP vs. RD scheme. Now the next important question that would arise in your mind is, SIP or RD which is better? Well, the answer to it is very subjective and will vary from person to person. Both the investment schemes are very different from each other and have their own benefits. Depending upon your risk appetite and tenure of the investment, you can select the right scheme for you. You can also refer to the difference between the two schemes and understand which investment option is ideal for you.
The beginners or inexperienced investors often find it difficult to take the investment decisions on their own. To assist them in financial planning, IndiaNivesh Ltd. is always at their assistance. We understand your financial goals and risk appetite before suggesting you any investment plan or scheme. We provide our clients with innovative and customised financial solutions. Our aim is to exceed the expectation of client in all our endeavours. You can even open a demat account with us and trade or invest in the stock market on the basis of our regular research reports.
Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.