There are several long-term investment options offered by banks and financial institutions. You can classify them into broad categories of equity and debt investments. The most common investment instruments are RD, FD, and SIP. Recurring deposit (RD) and Fixed Deposit (FD) are term-based investment products offered by banks. They are similar to debt products since the bank owes you the principal plus interest upon maturity. Systematic Investment Plans (SIP) are investments in mutual funds that can be equity-oriented, debt-oriented, or a mix of both. These instruments are meant for different kinds of investors. To evaluate the suitability of each for yourself, read through this extensive comparison of RD Vs FD Vs SIP.
What is a Fixed Deposit (FD)?
Fixed Deposits (FDs) are one of the best investment options for those looking for low-risk, medium-interest investment schemes. They offer fixed rates that allow you to set aside your funds for an agreed period of time. An FD provides returns based on current market conditions. Mostly, banks provide FD investment accounts. Other financial institutions such as non-banking financial institutions (NBFC) and housing finance companies (HFC) also offer FD schemes. The interest rate of FD is higher in comparison with bank saving accounts. FD compounds half-yearly or annually. Option to reinvest is also available post maturity. You can also redeem FD before the maturity date against a small penalty amount.
What is a Recurring Deposit (RD)?
Recurring Deposit (RD) is a popular investment option that offers customers the flexibility to choose the amount and term. RD is useful to fulfill both short-term goals, as well as long-term ambitions. With monthly savings channelized into investments by banks and NBFCs, you can enjoy guaranteed wealth generation over time. Consequently, RDs offer higher gains on long-term deposits with low risk. It is available in flexible tenure starting 6 months to 10 years. It is the best option to generate lump-sum wealth over time with monthly installments. Interest rates are calculated every quarter and compounded annually on these deposits.
What is a Systematic Investment Plan (SIP) ?
A Systematic Investment Plan (SIP) allows you to invest small amounts of money regularly. The sum is further invested in your preferred mutual fund scheme. Therefore, it helps to diversify your risk over time and enables people who don’t have a lump sum money to start investing. Once you activate a SIP, the bank deducts a fixed amount every month for the tenure of the investment. With each SIP installment deposit, you get a certain unit of the mutual fund. You can choose a mutual fund scheme based on your risk appetite and requirement. NAV’s of mutual funds update daily so the purchase cost may vary and the same will reflect on your units.
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RD vs FD vs SIP – Difference Between RD, FD, and SIP
|Recurring Deposit (RD)||Fixed Deposit (FD)||Systematic Investment Plan (SIP)|
|Interest Rate||Interest rates vary from 5% to 9%. Special rates are applicable for senior citizens||Rates of Interest varied from 5% to 9%. Senior citizens can avail special interest rates||Interest rates are not guaranteed on SIP mutual funds. They were varying from 12% to 22% for the last 5 to 10 years.|
|Type of Investment||In installments||Lump sum||In installments|
|Scheme||Choose among the tenor and interest rates. Flexible schemes are available too.||Select among the tenor and interest rates. Flexible schemes are available too.||Choose between equity and debt funds depending on your risk appetite and needs.|
|Returns||Returns are fixed and are best known at the time of investment.||Fixed returns and are best known at the time of investment.||Returns depend on equity and debt markets along with the fund scheme chosen.|
|Tenor||The maturity date for RD can be chosen from six months to 10 years.||Maturity date for FD can be from 7 days to 10 years.||There is no fixed tenure for SIP.|
|Risk||RD is low risk and is a safe form of investment.||FD is low risk and is a safe form of investment.||SIP offers moderate to high risk. The returns depend on the stock market or debt instruments.|
|Liquidity||RDs are highly liquid. Premature withdrawal will attract a penalty.||FDs are highly liquid. Premature withdrawal will attract a penalty.||SIPs can be stopped anytime. However, exit charges may apply.|
|Taxation||Taxable based on the tax slab in which investor falls||Tax applicable based on the tax slab in which investor falls||Taxable as per LTCG and STCG|
|Best option for||Conservative investors||Conservative investors||For both aggressive and conservative investors|
RD vs FD vs SIP – Which is Better?
As FD, RD, and SIP are similar in many aspects, there are fundamental differences among them. They offer different benefits and the suitability of each instrument depends on investor needs.
RD and FD are good investment avenues for risk-averse investors. Investors can choose from these depending on if they want to deposit money every month or in a lump sum. Both fixed deposits and recurring deposits both give assured returns. As a result, both these instruments help to fulfill the short-term and long-term goals of an individual. Consequently, RDs can be a better instrument to build an emergency fund. This is because you set aside a regular sum in RD and a lump sum amount in FD. which can help you earn interest. The returns on both RD and FD are taxable, so this investment is suitable for investors in lower tax brackets. These options are also suitable for senior citizens because they are safer than equity investments and earn assured returns.
Alternatively, SIPs are for investors who want to take higher risks for potentially greater returns. SIP is good for investors who have long-term goals and long-term investment horizons. It is therefore a better investment avenue for investors looking for tax exemptions with products like ELSS.
You can decide on the best product among SIP vs RD vs FD. It is advisable to make decisions based on your need, risk-taking capabilities, and investment horizons.
When you are choosing between these products, consider your income slab, risk capacity, investment horizon, and investment goal. If you can afford to take relatively higher risk and commit for a longer duration opt for SIP investment. In case you want to minimize risk, choose to invest in an RD or FD to diversify your portfolio.