SIP vs RD: Where to put your money

Introduction:

If making a choice always seems taxing, and you struggle to make decisions, you are certainly not alone. However, you can avoid second-guessing with accurate information. Money-related decisions are never easy, particularly the ones that can change your future. Hence, a detailed comparison becomes necessary. If you are doubtful about SIP vs RD, here is a crisp yet comprehensive comparison that can help you make the right decision.

Understanding the basics

A Systematic Investment Plan (SIP) is a method of investing in mutual funds in India. It is not an investment instrument but a way to invest. SIPs allow you to make regular investments in a scheme of your choice at your chosen frequency and amount.

Recurring Deposits (RD) are periodic term deposits offered by banks and post offices. They allow you to invest money in regular instalments and withdraw them at the time of maturity, along with the accumulated interest.

There are several other distinctions between the two. Let’s find out what these are.

Differences between SIP and recurring deposits

• Risk:

  Since mutual funds are market-linked, they may carry risks. However, SIPs can be made in different types of mutual funds like high-risk equity funds or relatively low-risk passive debt funds. You can also choose between a small, mid, or large-cap fund. You have a lot of choices and can select options based on your risk appetite.

RDs are low-risk products since they are not linked to the market. The rate of interest is fixed, and your money is not exposed to any fluctuations.

• Rate of interest:

  The rate of return can vary in mutual funds based on the type, investment term, market performance, etc. RDs, on the other hand, can offer fixed interest rates that usually range between 2.50% and 7.50%. 

• Tax:

  Equity-Linked Savings Scheme (ELSS), a type of equity mutual fund, offers tax benefits under Section 80C with a deduction of up to Rs 1.5 lakh per annum. RDs offer no such tax benefits.

• Tenure:

  One of the greatest benefits of SIPs is that there is no tenure. You can invest for as long as you want. However, RD tenures only range between six months and ten years.

• Frequency:

  SIPs can be made daily, weekly, monthly, and quarterly. RD instalments can only be made monthly. 

SIP vs RD – the better choice

SIPs are convenient, flexible, and even facilitate tax savings in some cases. They may be the better choice if you are looking for capital appreciation. Since your money is invested in the market, you get to tap into emerging market opportunities. SIPs offer the benefit of the power of compounding and reinvest your profits along with the principal back into the market to earn higher returns. This may help you earn more than the fixed interest offered by RDs.

In addition to this, SIPs also offer the advantage of rupee cost averaging. This means that while your SIP amount stays the same, the number of units you purchase in every instalment differs. When the price is low you get more units and when the price is high you get fewer units. However, over time, the cost of investment gets averaged out.

RDs, too, facilitate investing in parts. The low minimum amount, usually Rs 1000, encourages people of different age groups as well as professional backgrounds to save and invest. However, the investments can only be made monthly. Also, you may incur penalties for premature withdrawals.

Conclusion

SIPs and RDs can both be helpful in meeting your future goals. However, they differ in risk and returns. It may be advised to carefully jot down your goals and objectives for investments and then select an option that matches your requirements.

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