RD Vs SIP: Why SIP (Systematic Investment Plan) is better than RD (Recurring Deposits)

In times of high inflation and market volatility, investment in different assets is a wise way to earn stable income. Investors with low-risk appetites prefer to choose investment tools like Recurring Deposits (RD), while others who are not that risk averse and have knowledge about the stock markets opt for Systematic Investment Plan (SIP) in Mutual Funds.  

In recent years, the Systematic Investment Program (SIP) in Mutual Funds has become a popular mode of investment. In October 2022, the total amount collected through SIP was Rs 13,041 crore, which is the highest so far in FY23.  

SIP vs RD 

Recurring deposits are debt instruments that offer capital guarantees to investors on their invested money. SIPs are a similar way of investment but with exposure to mutual funds. Investors can make fixed investments at periodic intervals instead of making a lump sum investment.  

Similarities 

• Both investment tools are based on the principle of regular (monthly or quarterly) investments. 
• The schemes allow investors to invest small sums over a period (5 years in RD) and build a corpus.  
• They also offer a high degree of flexibility. 
• Both schemes can be stopped at any time. Investors can withdraw your money, but there can be charges for the early exit. 
• If investments are not regular, the schemes can get blocked and investors might have to start them again. 

Differences 

RD schemes have a specific deposit plan that will give you guaranteed returns. Sometimes, investors can also opt for flexible recurring deposit schemes for flexibility. SIPs in mutual funds can be in debt or equity type of funds depending on investors’ risk capability. 
RD schemes are not prone to risks, while returns on SIPs can be variable. Like if one chooses equity funds, he might lose all his money or gain depending on the stock market. As per AMFI data, SIP generally delivers good returns if held for a long period of time. 
The rate of interest is fixed for a recurring deposit scheme. So, investors know what amount they would get at the end of their tenure. On the other hand, returns from SIPs are linked to the market. When markets go up, your MF scheme makes more money, and vice-versa. 
Recurring Deposit schemes are liquid but premature withdrawal or closure can attract penalty charges depending on the banks. For SIPs, the schemes can be closed anytime and the money can be withdrawn without any penal charges. Only SIPs in equity-linked saving schemes (ELSS) come with a lock-in of three years. 
In terms of tax, RDs aren’t tax-friendly. Interest earned in an RD is taxed at your income-tax rate. But if you invest in SIP in debt funds, they are eligible for capital gains tax. 

RD vs SIP: Which one is better? 

An investor can earn up to 5.8 per cent to 7 per cent on RD schemes for five years. While SIP in mutual funds can offer an average 12 per cent return depending on the type of funds. It may go up to 15-18 per cent if the market conditions are favourable. Long-term schemes can have more benefits as investors gain on compounding interest.  

For example, in a RD scheme in post office, if one puts in Rs 5,000 a month for 5 years at the interest rate of 7 per cent, the amount at maturity will be Rs 3,59,663.95.  

BREAK-UP OF MATURITY VALUE 

Investment Amount: Rs 3,00,000 

Interest Earned: Rs 59,663.95 

Maturity Amount: Rs 3,59,663.95 

Return from SIP 

In the case of SIP, the average return would be 12 per cent.  

Investment Amount: Rs 3,00,000 

Interest Earned: Rs 1,12,432 

Maturity Amount: Rs 4,12,432.