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The financial market in India has been witnessing many changes in recent years. New financial instruments have gained importance along with the previous instruments that exist. Hence, there are plenty of investment options in the industry, like stocks, fixed deposits, recurring deposits, mutual funds, bonds, etc. However, Systematic Investment Plan SIP and Recurring Deposit RD are two popular saving schemes for investors for building a corpus. In both the schemes, investors can contribute monthly towards accumulating money. . 

Here, in this article, we aim to provide more information about SIP vs RD and understand which investment option is better based on your financial needs. 

What is a SIP Systematic Investment Plan?

Systematic Investment Plan is a way of investing in mutual funds. Through SIP, investors can deposit a small sum of money at regular intervals – weekly, monthly, quarterly, etc., in any of the mutual fund schemes. The amount of investment can be as low as INR 500. This money is auto-debited from the investor’s bank account on a specific date. Based on the scheme, the mutual fund manager will allocate the equity or debt amount. 

Mutual fund investments through SIP helps investors to maintain investment discipline. Also, one need not worry about the market volatility and timing the market. It allows investors to spread their investments over time and park their money at different market levels. Therefore, SIP is a good way of inculcating a habit of saving and investing regularly.

Moreover, investing in tax saving schemes, i.e. ELSS funds (Equity Linked Savings Scheme) through SIP provides a tax exemption under Section 80C up to INR 1.5 lakhs. 

What is a Recurring Deposit RD?

Recurring Deposit is another saving option that helps individuals to save for their future. In a recurring deposit scheme, the individual needs to choose the tenure and monthly deposit amount. This amount is deposited regularly for a predetermined period. And then, the investor earns interest on the deposits. Usually, bank RD tenure ranges from a minimum of 6 months to maximum term of up to 10 years. Once the RD matures, the lump sum amount and interest are paid back. One can easily earn through investing in RD as the interest rate is fixed throughout the tenure.

RD interest rates vary from bank to bank like any other saving account. The RD interest rates are decided based on the tenure and deposit amount.  In Indian banks, the interest rates range from 3.5-8.5% for different periods. The interest rate for senior citizens is slightly higher than the regular accounts. Many banks offer an additional rate of 0.25%-0.75% for senior citizens. Also, the interest of recurring deposits is compounded quarterly. 

For instance, a person looking to save INR 3 lakhs for a foreign trip. One can use Scripbox’s RD calculator to estimate how much to deposit every month and for how many months.

Key features of SIP Systematic Investment Plan

The following are the key features of the Systematic Investment Plan SIP.

  • SIPs inculcate a habit of saving and investing regularly. 
  • The minimum amount to start a SIP can be as small as INR 500. One can increase the amount as when required
  • The investor can choose the frequency of the investment cycle – weekly, monthly or quarterly. Thus, investment is spread over time and gives the benefit of rupee cost averaging.
  • The investment amount is fixed while starting a SIP. However, one can use the “SIP Top-up” option to make an additional contribution.
  • An investor has the flexibility to invest any sum of money through SIP. There is no restriction on the maximum amount of investment.
  • One can choose to cancel their SIP anytime. They can log in on their online account or send a cancellation request to the respective AMC

Key features of Recurring Deposit RD

The following are the key features of Recurring Deposit.

  • Recurring Deposits inculcate a habit of saving money regularly.
  • The minimum amount to start an RD is as low as INR 10. However, this can vary from bank to bank.
  • The minimum tenure of an RD is 6 months and can go maximum up to 10 years.
  • RDs offer higher interest rates than savings accounts. Also, they offer slightly higher interest rates for senior citizens RD accounts.
  • Premature withdrawals are not allowed in bank recurring deposits. However, some banks allow premature withdrawals in some cases at a penalty fee. 
  • One can also avail a loan against RD. They use RD as collateral and get up to 80-90% of the deposit as loan. 
  • One can set a standing instruction on their bank account to automatically credit the RD account from their savings account or current bank account. 

Comparison between SIP and RD- SIP vs RD

To make a prudent decision one can evaluate the differences between SIP and RD. The following are Some of the distinctions between SIP and RD. 

Investment Scheme

In mutual fund SIP, investors have an option to invest in different schemes. They can invest in an equity fund or debt fund (fixed income fund) depending on their understanding of risk. 

An investor has to invest in a deposit plan in an RD scheme that will give fixed returns. There are no investment options. One can also opt for flexible recurring deposits if they are looking for more flexibility. 

Investment Tenure

Mutual fund investments have no fixed tenure. Investors can invest in any period. 

Recurring deposits have a fixed maturity date. The minimum tenure for investment is 6 months. However, the maximum term can go up to 10 years. 

Risk

The risk associated with SIP investment depends on mutual funds which are subjected to market risks. The performance of the fund depends on market performance. However, one can minimise their risk associated with SIP by holding it for an extended period. 

Recurring deposits are not prone to risks as it is deposited in a bank. It is one of the safest investment options and suitable for investors with low risk tolerance levels. Also, there is no risk of capital loss. 

Returns

The returns of SIP investment are dependent on market performance. It also depends on the equity fund or debt fund chosen by the investor. 

In a recurring deposit, the rate of interest is fixed. Therefore, the return is also fixed, which is known at the time of investment. 

Investment Frequency

In SIP, investors can invest a small amount on the weekly, monthly or quarterly basis. This again depends on the investor’s choice.

In RD, investors can only invest a fixed amount of money every month. 

Liquidity

SIP offers better liquidity in comparison to RD. SIP can be closed, and money can be withdrawn anytime. However, investors have to bear exit load if they are redeeming within one year of investment.

RD is also liquid. However, investors have to pay pre-withdrawal charges in case of early closure/withdrawals. 

Taxation

Investments in SIP and SIP returns are exempted from tax only when invested in Equity Linked Savings Scheme (ELSS) mutual funds. These funds have a lock-in period of 3 years. These tax-saving mutual funds are also eligible for tax deduction under section 80C of Income Tax Act, 1961. However, to avail tax benefit, each SIP shall be locked in for three years. 

The RD amount or the interest earned on it is not exempted from tax. They are taxed as per the income tax slab of the investor. However, TDS of 10% is applicable on interest earned up to INR 10,000. 

One can use Scripbox’s income tax calculator to calculate their income tax liability. 

Investment Goal

SIPs are suitable for investors to meet both their short term and long term financial goal. This again depends on the frequency of investment, type of mutual fund scheme, understanding of risk and other factors. 

Usually, investment in RDs helps for meeting short term investment goals. They do not serve the purpose of long term wealth creation

Which is suited for you – SIP or RD?

In India, both Systematic Investment Plan or Recurring Deposit are one of the investment choices for individuals. The significant difference between SIP & RD  two is the risk and return factor.  RDs are considered a secure investment option, especially for investors looking for their invested capital safety. On the other hand, SIPs can also be beneficial, taking into consideration all the risk factors. Furthermore, SIPs caters to a wide range of investors having diverse risk profiles. 

Ultimately, investors should make investments to allow their investments to grow and generate returns. Moreover, every investor must consider their financial goals before deciding to invest their money. One must align their investments, whether SIP or RD to their short or long term investment objective. Also, investors must have a proper understanding of risk before choosing to invest in SIP. Those who have low-risk tolerance levels and are looking for guaranteed returns, then RD is more suitable to them. Also, RDs can be a source to meet investors’ short-term goals by investing a fixed amount every month. On the other hand, SIP allows investors to invest weekly, monthly or quarterly. Also, they offer an advantage to investors for selecting schemes like debt fund (fixed income fund) or equity mutual fund. Therefore, having a proper financial plan in place helps investors for a wise investment decision. 

Scripbox’s mutual fund calculators like SIP calculator and returns calculator are available online, allowing investors to check their potential returns from any fund.