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.
- Scheme of Investment
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.
- Frequency of Investment
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.
- Choice of Investment
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.
- Tax Benefit
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.
- Investment Goal
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.
Tax Free Bonds – Meaning, Features & Best Tax Saving Bonds for Investment
Investors always look for opportunities to invest in avenues that can give them good returns in the long run. Along with high returns on investments, they also look for tax saving options. The tax saving investment options that are popular in terms of high return and zero taxation are tax free bonds and tax saving bonds. If you are looking to make tax saving investments, this article will help you in learning about tax free bonds in India and its related information in detail. Let us first understand what tax free bonds in India are. What are Tax Free Bonds? Tax free bonds are issued by the government enterprise. They are like financial products and includes municipal bonds. They are a low-risk investment option and offer a fixed rate of interest. What makes tax free bonds even more attractive is the fact that it makes you eligible to claim tax exemption under section 10 of the Income Tax Act of India, 1961. The money collected by the government from these bonds is invested in housing and infrastructure projects. The maturity period of these bonds is 10 years or more. The next important question that must be arising in your mind is who should be investing in tax free bonds in India. So let us learn about the investors who can invest in tax free bonds. Who Can Invest in Tax Free Bonds? Investors who are looking for a fixed annual income and interest proceeds can invest in the tax free bonds. It is also a good investment avenue for investors who have a lower risk appetite and are looking to invest for long term duration. Individual investors like Hindu Undivided Family (HUF) members and Non-resident Indians (NRIs), who want to diversify their portfolio can also invest in these bonds. Furthermore, SEBI has allowed qualified institutional investors to invest in these bonds. Partnership companies and limited liability groups are also allowed to invest. In the last few years, the regular investors in tax free bonds include regional banks, cooperative banks, trusts and corporate companies. Let us now learn about the features of tax free bonds. Features of Tax Free Bonds Exempt From Tax The main feature of tax free bonds is that they are exempt from tax. The interest earned on these bonds is free from income tax. However, it is advisable that you must declare your interest as income from tax free bonds and not to claim the tax deduction on the investment amount. Moreover, no tax deducted at source (TDS) is applicable on tax free bonds. These bonds are beneficial for individuals who earn higher income and fall under higher tax bracket. Low Risk Since tax free bond schemes are run by the government, the chances of default on interest payment is almost nil. This safeguards your capital and also provides you fixed annual income in the form of interest. Liquidity Tax free bonds are long term tax saving investment option and they have extended lock-in period. This suggests that you cannot liquidate tax free bonds quickly. Therefore, you must be aware of the fact that these tax free bonds cannot act as your emergency fund. Lock-In Period While investing in tax free bonds you must ensure that you will not be needing the money in the short term. This is because tax free bonds have lock-in period of 10 to 20 years. This means, you cannot withdraw your investment before the maturity period. Issuance And Transaction The tax free bonds can be purchased through a demat account or in physical form. They are traded on the stock exchange. Here you must remember that only the interest earned on these bonds is tax free and capital gains made by selling the bonds in the stock market is taxable in nature. Returns The returns on tax free bonds are dependent on your purchase price because these bonds are traded in lower volumes and have limited buyers or sellers. Interest Income The investors in the tax free bonds receive the interest on an annual basis. The rate of interest on these bonds ranges from 5.50% to 6.50%. The rate of interest can fluctuate because they are related to the current rate of government securities. The rate of interest on these bonds is very attractive considering the fact that they are exempt from tax. Let us now have a look at few of the popular and upcoming tax free bonds of 2019. Popular and Upcoming Tax Free Bonds of 2019 Some of the popular and upcoming tax free bonds of 2019 are HUDCO N2 Bonds, REC N7 series, HUDCO N3 Bonds, National Highways Authority Of India, REC N6 Bonds, Indian Railways N7 Series, Indian Renewable Energy Development Agency, Power Finance Corporation, etc. Often people use the term tax free bonds for tax saving bonds and vice versa. But in reality, they both are different from each other. In this section of the article you will learn about how tax free bonds are different from tax saving bonds. Difference Between Tax Free Bonds and Tax Saving Bonds Under tax free bonds, the interest earned is exempt from tax under section 10 of the Income-tax Act. The lock-in period is from 10 to 20 years and you can invest up to Rs. 5 lakhs. On the other hand, under tax saving bonds the initial investment made is exempt from tax under section 80CCF of the Income Tax Act. The tax saving bonds have a buy-back clause and you can withdraw your investments after 5 or 7 years. The tax exemption for tax saving bonds is up to an investment of Rs. 20,000. Let us now learn about investment and redemption of tax free bonds. Investment and Redemption of Tax Free Bonds You can make an investment in the tax free bonds through the demat account or in physical form. It is simple and hassle-free to make an investments in these highly rewarding bonds. However, you can make investment only when the period of subscription is open. Just like investing, redeeming tax free bonds is also a very simple task. You can redeem the bonds after the completion of the tenure. Investing in the tax free bonds and tax saving bonds are highly rewarding as they involve almost no risk. If you are new to the financial market or you are looking to invest in tax free bonds or tax saving bonds, you can take the assistance from IndiaNivesh Ltd. We are the leading broking firm and financial advisors in the market. With our assistance, you can achieve your financial goals and objectives in a desired manner. Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
Total Expense Ratio - Know All about Total Expense Ratio (TER) Of Mutual Funds
If you have ever considered who pays for mutual fund advertisements, the costs of managing your mutual fund investments, operating costs of mutual fund companies and others, it's time to know about Total Expense Ratio [TER] of mutual funds. As a mutual fund investor, you contribute towards the running costs of managing your mutual fund company, that is the AMC or the asset management company. For example, if you have invested in an equity mutual fund, you could be paying an annual cost of approximately 2.5% of the total value of your investments. Generally, in India, equity funds charge 2.2% to 2.4% as the expense ratio. After adding all the costs together, it is known as the total expense ratio. If the TER is approximately 2.4% per annum, it is proportionately debited each day. Typically, it is seen that if the assets of the mutual funds are small, the expense ratio could be high. For the mutual fund to meet its costs from restricted or a small asset base, it could raise the expense ratio. Similarly, if the net assets of the mutual fund are substantial, ideally the expense percentage must be slim. In September 2018, SEBI initiated significant alterations by bringing ending down the total expense ratio of mutual funds. It also changed the process of providing commissions to distributors. Understanding the elements of expense ratio Numerous charges within the expense ratio are used to run a mutual fund scheme. Mutual fund investors contribute towards the expense ratio on a day-to-day basis, and complete disclosure is revealed every six months by the AMC on the deducted fees. There are five significant components within the expense ratio. These include: Management charges - This is a considerable cost and constitutes an integral portion of the TER. It is used to run the fund office, manage a mutual fund, recruit staff and more. Generally, it is a fixed cost for any mutual fund. Service/GST tax - Effective from July 1, 2017, service tax has been replaced by GST, and today is an integral component of the total cost of a mutual fund. The GST of a mutual fund is approximately 18% which makes it a critical cost component for all mutual funds. Transfer agent charge - Transfer agents are as crucial as registrars in equity investment. Typically, the mutual fund registrar takes care of unitholders’ services that include new investments, processing the changes in ownership, dividend reinvestment, managing accounts, redeeming accounts and more. Since mutual fund houses are unable to handle such a colossal activity on their own, two principal mutual funds transfer agents in India, known as KARVY and CAMS accomplish these activities. Brokerage and statutory charges - These two types of commissions are essential in mutual funds. These fees are applied to execute transactions in equity and debt as part of an individual's portfolio management. Besides, the mutual fund house pays commissions to distributors and brokers who promote their products to investors. In this, there is an upfront brokerage to procure new investors and a trail commission to retain clients. A direct plan can help you to save on brokerage costs and hence could be 70 to 80 basis points lower than a regular plan. Operating expenses - Day-to-day operations and marketing costs are also part of the TER. Fees related to advertising, brand promotion, branding, under marketing costs and hence, regardless of whether you are under a direct or regular plan, every mutual fund investor pays towards these charges. The impact of expense ratio on fund returns Say you have invested ₹20,000 in a mutual fund that has an expense ratio of 2%. This means you have to pay ₹400 to the fund manager, each year to manage your investment in the fund. Simply put, if the mutual fund provides you with a yield equal to 15% with a TER of 2%, your returns will be approximately 13%. Also, the net asset value of your mutual fund is stated after taking into account all the charges and costs. Therefore, it is critical to understand the expense ratio of the mutual fund you are paying to the AMC. Conclusion The total expense ratio plays a significant impact on your returns, especially over the long-term. Seek the best TER for your mutual fund to maximise your gains and create wealth.Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.
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