Section 12 – Recurring Deposit vs SIP Investment In Mutual Funds

Table of Contents

Recurring Deposit (RD) and Systematic Investment plan (SIP)both are periodical investment of a certain fixed amount at fixed intervals. Investors sometime get confused to differentiate between the two investment routes. Which one is better investment option SIP or RD?

To make prudent investment decision, investors should clearly understand the distinctions between SIP and RD. A point wise comparison of SIP and RD investment is given here to evaluate the difference between SIP and RD.

What is RD (Recurring Deposit)?

RD is considered as a simple and straight investment product and very popular with conventional investors. It is because it can be opened by a saving account holder very easily in the same post office or bank by simply filling a request form. You can specify the amount of monthly deposit and tenure and get it linked with your saving account. The periodical investment amount will be automatically debited from your saving account and credited in the specified RD account.  The availability of banks and Post offices across the country has made it more convenient for suburban investors. Rate of interest is fixed and pre-determined.

What is SIP (Systematic Investment Plan)

A Systematic Investment Plan (SIP) is a facility offered by mutual funds to the investors to invest pre-determined amount at a regular interval in the selected scheme. It does not offer a fixed return on investment but, over time, gives higher returns as compared to Recurring Deposits. Your money invested in SIP is managed by expert finance professional in a safe and secure way. Even though it is subject to market risks, if invested for a longer duration, it rarely gets affected by market dynamics and gives reasonable returns due to average costing and power of compounding.

Which one is better investment option SIP or RD–A brief comparison table of features?

FactorsRecurring Deposit in bank/post office (RD)Systematic investment Plan (SIP) with Mutual Funds
Periodical investment facilityA pre determined amount can be deposited on monthly basis only.Investor can deposit a pre determined amount on weekly, monthly or quarterly basis as per his choice.
Available variety of schemesThe variety of investment schemes is not available.The verity of investment schemes is available. Investor can invest in schemes like equity, debt, hybrid as per their choice and risk bearing capacity.
Investment durationIt has a per determined maturity period. The investment duration ranges from minimum 6 months to maximum 10 years.Investor can invest in SIP for any duration subjected to minimum lock in period specified by the scheme, if any. There is no cap on maximum period.
Maturity amount (Earnings)Maturity amount on RD is fixed and kwon to the account holder at the time of starting of the investment. At present, the offered interest rate on RD is around 5 to 6 percent p.a.Maturity amount in SIP investment is not fixed because it is linked to the market. If we analyze the returns earned in last many years on long term SIP investments, in general it is 12% to 15% p.a. for equity and 8% to 10% for debt MF investments.
Liquidly of amountIf an investor withdraws the RD account before its maturity, they have to pay pre withdrawal charges.In most of the SIP schemes investor has to bear exit load if they redeem their investment with in 1 year or specified lock in period. There after the money can be withdrawn any time without any penal charges.
Security on investmentIt is a safe investment carries no risk of capital loss.Mutual fund investments are subjected to market risks.
TaxabilityTax is payable on interest earned during the year whether received or not on accrual basis.Tax can be deferred till actual redemption. Also, tax is exempt up to Rs 1 lakh on equity Long term capital gain (LTCG) and indexation benefit is available on debt oriented schemes on LTCG

With the above analysis, one can decide where to invest depending on Time Horizon, risk taking capacity, expectation of returns, taxability.

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