Investment option SIP or RD – A COMPARISON

Which one is better investment option SIP or RD - A COMPARISON?
SIP Vs RD
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Which one is better investment option SIP or RD – A COMPARISON?

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?

Systematic investment plan commonly known as SIP and Recurring Deposit called by masses as RD, both are the popular investment destinations for a common retail investor. SIP schemes are a product of mutual fund houses where as RD is offered by banks/post offices. In both the financial products, investment is made on a periodical basis.

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, in general, 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 of features?

  1. Recurring deposit account offers only monthly deposit facility to the account holder. You are bound to opt the deposit periodicity on monthly basis. Whereas in SIP investor can choose weekly, monthly or quarterly deposit option as per their convenience.
  1. In a RD account your option of deposit is limited to periodical amount and investment tenure only. For example, you can open an account of Rs 5000 for 5 year duration. Another investor can open an account of Rs 10000 for 3 year duration. It means, investor has choice to select duration and amount only. They cannot change the investment scheme. Under SIP route of investment, different investment schemes are available. Investor can invest in schemes like equity, debt, hybrid as per their choice and risk bearing capacity.
  1. You open a RD account for fixed investment duration. The minimum investment duration is 6 months and maximum duration is 10 years. Once you opened a RD account with investment duration of your choice, it cannot be changed. Where as in SIP investment an investor can invest for any duration subjected to minimum lock in period specified by the scheme. There is no barring of maximum duration of investment. If an investor is investing for a future goal of 15 years from now, RD deposit may not be a right place of investment.
  1. Every RD account has a fixed maturity amount and kwon to the account holder at the time of starting of the investment. It is because the rate of interest on such account is fixed. At present, the offered interest rate on RD is around 5 to 6 percent yearly. 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.
  1. Liquidity is a factor which must be considered before making an investment. If you opened a RD account for 8 years and on 6th year of this deposit you want to withdraw your RD investment. In such a case, you have to pay some penalty for the withdrawal. If an investor withdraws the RD account before its maturity, they have to pay pre-mature withdrawal charges. In most of the SIP schemes investor also has to bear exit load if they redeem their investment within 1 year or specified lock in period. Thereafter the money can be withdrawn any time without any penal charges. Once the lock in period over SIP investments can be withdrawn at the applicable net asset value(NAV).
  1. RD accounts are considered as a safe investment. It carries no risk of loss of principal or interest amount. SIP investment is subject to market risk.
  1. You can increase or decrease the periodical investment amount by filling up a request application in your SIP investment. In RD account this facility is not offered to the account holders in general.

A comparison table is given below for better understanding of readers:

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
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