Contents
SIP vs RD are two popular saving plans between retail investors, which helps the idea of long-term wealth creation. SIP is an investment plan in mutual funds and RD is a recurring deposit in banks. But still, they have many differentiations. To make reasonable decision investors should judge the differences between SIP and RD. In this article, we will discuss various factors of differentiation.
Understanding SIP & RD
- SIP ( Systematic Investment Plan )
- RD ( Recurring Deposit)
Recurring deposit is a deposit facility given by the bank that supports people with regular income to deposit a fixed amount every month into their account and get interest at the rate relevant to fixed deposits
Benefits of sip vs rd
Systematic investment plan
- Discipline
Investing a small sum every month, not only benefits you in buying a mutual fund but it also implants a fine attitude of regular savings.
- Rupee cost averaging
SIPs assist you to take benefit of rupee cost averaging. When the market volatility is high, you buy some units while in terms of low volatility, you buy more units. This averages out your all over investment.
- Simple and comfortable
Investing by SIPs is easy and hassle-free. You can subscribe to multiple mutual fund houses with an online SIP. You just need to register by inserting a user ID and Password, connect your bank account and begin a SIP investment now.
Recurring Deposits
- Short term investment
An RD is extremely fitting for a short term investment with a tenure of 6,12,18 months or more. It is perfect for recently employed salaried individuals who are preparing to grow savings for their near future.
- Online RDs
A recurring deposit is 1 of the simplest schemes to avail from a bank. In case you are a current customer, you can simply open an RD linked to your savings/salary account by putting an online application by your net banking facility.
- Flexible
Many RDs come with the facility of adjustable payment where you will not face a penalty in case you miss out on any of your monthly payments. Also, you can withdraw the money anytime you want.
Sip vs RD
Systematic Investment Plan is a monthly investment in mutual funds while Recurring Deposit is a kind of bank deposit. However, there are some basic differences among SIP vs RD which one needs to read before investing.
| Basis | SIP | RD |
|---|---|---|
| Liquidity | SIP is a more reliable option as you can close SIP and withdraw money without paying any penalty. | RD is a liquid scheme but you can go for early withdrawals. In case of closure, you might have to pay fine charges. |
| Investment | One can invest in mutual funds by SIP which can be weekly, monthly or quarterly. | RD is a fixed deposit account where you can do monthly investments. |
| Risk Factor | Returns from the SIP are changeable. There can be a risk of capital and returns depends on the stock market. But the SIP provides great returns if taken for a long time. | Recurring Deposits are not likely to risks and are one of the safest forms of investment. |
| Taxation | The investment and returns from SIPs are excused from any tax only if the investment is in ELSS funds. | RD amount or the interest formed on it is not accountable for any exemption from tax. |
| Tenor | There is no tenor for SIP, the investors can do it for any time. But, the minimum time should be of 6 months. | RD has a maturity date. The smallest tenor is 6 month while investors can do RD for more than 10 years. |
| Payment Frequency | You can make investments by monthly, periodically, semi-annual or yearly. | You are expected to make monthly instalments. |
Points of differentiation
Returns
Mutual funds have given more than 15% increased annual returns over a7-10 years time horizon. Still, an RD gives returns between 6-7% yearly. Along with the influence of demonetization, interest rates are supposed to reduce. If interest rates reduce the yields of an RD will decline as well. So it is safer to invest in an investment avenue which would give you more than the inflation.
Taxation
SIP is tax-efficient when matched to RD. In the case of a recurring deposit, the income that is received as an Interest is attached to your entire income and is taxed as per your tax slab. In the case Equity Mutual Funds there is not long term capital gains tax if you withdraw after 1 year.
Diversification Advantage
With the little part of saving each month, you can diversify into various asset classes in mutual funds. Suppose an investor with a surplus of 10,000 or more than that every month which he wants to designate for his retirement and kids’ education goal. Rather of relying on 1 asset class he can change his investments in equity, debt and products which would generate higher returns with decreased risk.
Flexibility
In the case of RD, you have an exit load of 1% when you cancel or redeem the investments before the maturity date. In SIP you have the versatility of cancelling the SIP for the later dates, you will not any charge be imposed unless you redeem the funds.
Which is Better Investment Option
A final approach to create wealth is saving money every month. Typically, a SIP and an RD are 2 of the most profitable investment choices in India to save money every month. Both SIP and RD allow investors to invest little sums of money at regular periods to earn great returns. With a SIP, the investors have to invest a little amount of money, both monthly or quarterly, to receive market-linked returns. While with an RD, the investor invests a fixed amount of money for a pre-decided time to generate fixed returns. Now, the investors can quickly calculate SIP returns using a sip calculator to determine their investment needs. In India, few of the SIP is the most popular one.
Conclusion
Investors should do investments to support their investments to grow and produce better returns while holding their risk appetite. SIP enables investors to invest a little amount on a weekly, monthly or quarterly basis as per their preference. Mutual funds investments give the choice of selecting a scheme like debt or equity scheme based on the risk profile of an investor. But, investment in RD’s is to be done every month and receives a fixed rate of interest. So, SIP is the most preferred type of investment.
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Ring us at +91 9999379929. Our expert team will explain each and ever fund in details you for mutual funds. Even you can drop your mails on contact@wealthbucket.in
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