In India, there are two well-liked strategies for saving/investments over a longer time horizon; “Systematic Investment Plans (SIP)” and “Recurring Deposits (RD)”. Let’s understand RD vs SIP.
What is RD?
RD is a savings plan that requires monthly payments. We can start in Banks or Post Offices. In RD, you invest some money (as you decide) every month.
What is SIP?
SIP is the of investing money in the market in a systematic manner. Putting up a specific sum at specified intervals for investing in mutual fund schemes, is SIP.
Either RD or SIP are options for those who want to make monthly contributions to accumulate the corpus. To assist people in selecting their best alternative, the comparison of SIP and RD is provided in the following parts.
The distinctions between a systematic investment plan and a recurrent deposit are shown in the following table:
| Parameters | Recurring Deposit | Systematic Investment Plan |
Type of Investment |
Investors pay a certain pre-decided amount each month. | Individuals invest the money in a mutual fund scheme at fixed intervals such as quarterly, monthly, or semi-annually (in most cases – Monthly). |
Returns (%) |
The interest rates for RD range between 6% and 9%, depending on the type of Bank. Being the safest banks, nationalized banks offer lower interest rates & small cooperative banks offer slightly rates.
Almost all banks offer higher rates to senior citizens. Interest rates are fixed (guaranteed) in the case of RD. |
As we all know, SIP is investing in the markets. Hence, returns are not at all guaranteed. It depends on the Scheme type i.e. Equity, Debt, or Hybrid. |
Tenure |
The maturity period of RDs is somewhere between six months and 10 years. | SIPs do not have any specific tenure. You can invest for 1, 5, 20, 30, or 40 years as well. |
Flexibility |
The flexibility in RD is relatively less than in SIP. Investors cannot top-up the amount or reduce the amount of RD. | The flexibility is higher. Investors can top-up the amount or reduce the amount of SIP. Even investors can stop the SIP and keep the accumulated corpus invested. |
Risk |
Relatively safer than Equity SIP. However, RD in very small cooperative banks can be slightly riskier. | The kind of mutual fund chosen as well as the situation of the market as a whole will determine the risks involved with SIPs. Nevertheless, by investing over a longer time horizon, one might avoid such risks. |
Taxation |
Interest income from Recurring deposits is not subject to tax exemptions or deductions. Rather, the profits are subject to taxation based on the individual’s appropriate tax bracket. | Taxation is applicable on one’s STCG and LTCG. In the case of Equity MF, profits up to Rs. 1.00 Lakh are tax-free if the gain is Long-term in nature (above 1 year). |
Liquidity |
Recurring deposits are highly liquid, however, they involve payment of pre-withdrawal charges for premature withdrawals. | SIP also offers liquidity. Investors can close a SIP and withdraw money anytime. However, there is an exit load in some types of SIPs, if the units are redeemed before a specific period. |
Suitable for |
Conservative investors, Senior Citizens. | Conservative (SIP in Debt Funds), and aggressive investors. |
RD vs SIP: How to Choose?
SIPs and RDs are two often used tools for generating a corpus. However, risk and return are the two most important elements that investors often look at before investing.
While RDs are a highly secure investment option, some risks will be associated with SIP investments. It means SIPs can easily be suitable for individuals with varying risk profiles such as Conservative to High-Risk Takers.
Further, one of the biggest advantages of SIP, is investors can stop it in between, and at the same time, they can remain invested in the market. Investors need not withdraw already accumulated money in the portfolio but can stop new installments. In this way already accumulated money in the SIP portfolio will grow in the long-term.
To conclude, by comparing the differences between SIP and RD, investors may make an informed investment decision that will enable them to reach their financial objectives.