SIP vs RD: A Comprehensive Comparison of Systematic Investment Plan and Recurring Deposit

When it comes to long-term wealth creation, two popular savings plans in India are the systematic investment plan (SIP) and the recurring deposit (RD). Both options provide individuals with the opportunity to build a significant corpus through regular investments. While SIP involves setting aside a fixed amount at fixed intervals for investment in mutual fund schemes, RD is a savings plan that requires monthly payments. In this comprehensive comparison of SIP vs RD, we will analyse various aspects of these investment options to help individuals make informed decisions.

Difference Between SIP and RD

To understand the main differences between SIP and RD, let’s take a closer look at the following parameters:

Investment Type

• Systematic Investment Plan (SIP): With SIP, individuals invest their money in a mutual fund plan at regular intervals, such as quarterly, monthly, or half-yearly.
• Recurring Deposit (RD): RD requires individuals to deposit a fixed amount every month.

Returns

• SIP: Returns from mutual fund SIP have been between 12% to 22% in the last 5 to 10 years. It is important to note that these returns are not guaranteed and depend on market conditions.
• RD: RDs offer fixed interest rates, ranging between 5% to 9%. Special rates may apply for senior citizens.

Tenure

• SIP: SIP does not have any specific tenure. Investors can continue investing as long as they want.
• RD: RDs have a defined maturity period, which can range from six months to 10 years.

Scheme

• SIP: Investors can choose to invest in equity or debt funds depending on their investment objectives and risk tolerance. SIP vs RD
• RD: RDs offer fixed returns and do not offer the flexibility to invest in different schemes. However, some banks may offer flexible RDs. SIP vs RD

Risk

• SIP: The level of risk associated with SIP depends on the type of mutual fund chosen and the overall market conditions. However, investing over an extended period can help mitigate the risks.
• RD: RD is considered one of the safest investment options, as it involves practically no risk.

Taxation

• SIP: Taxation is applicable on short-term capital gains (STCG) and long-term capital gains (LTCG) from SIP investments. However, investments in Equity Linked Savings Scheme (ELSS) are eligible for tax exemption or deduction.
• RD: Income received from RD is not eligible for tax exemption or deduction. Instead, earnings are taxed based on the individual’s applicable tax slab. SIP vs RD

Liquidity

• SIP: SIPs provide comparatively better liquidity, as investors can close the SIP at any time and withdraw their money. However, if the units are redeemed before a specific period, an exit load may be imposed.
• RD: RDs also provide liquidity, but premature withdrawals may attract pre-withdrawal charges. SIP vs RD

Suitability

• SIP: SIPs are suitable for both conservative and aggressive investors, as they provide the facility to choose between equity and debt funds depending on the risk appetite.
• RD: RDs are best suited for conservative investors who prioritise capital preservation and prefer low-risk investment options. SIP vs RD

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SIP vs RD: Which one to choose?

Both SIP and RD have their own advantages and considerations. It is important to consider your investment objectives, risk tolerance, and financial goals to determine which option is best for you.

SIP: The Power of Mutual Funds

If you are willing to take more risk and aim for potentially higher returns, SIP can be an ideal option. Here are some of the major benefits of SIP:

• Liquidity: SIPs provide better liquidity than RDs. Investors can close their SIP at any time and withdraw their money, although exit loads may apply for premature redemption. SIP vs RD
• Flexibility: With SIP, investors have the flexibility to choose between equity and debt funds depending on their risk appetite and investment goals.
• High returns: Over the last 5 to 10 years, SIPs have generated returns ranging from 12% to 22%. However, it is important to note that past performance is not indicative of future results. SIP vs RD
• Tax Exemption: Investing in ELSS funds through SIP is eligible for tax exemption or deduction under Section 80C of the Income Tax Act.
• Market Timing: SIP allows investors to benefit from rupee cost averaging as they invest a fixed amount at regular intervals, buying more units when prices are low and fewer units when prices are high. SIP vs RD

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RD: Safe and Stable Returns

If you prefer a low-risk investment option with guaranteed returns, RD can be a suitable option. Here are some of the major benefits of RD:

• Guaranteed Returns: RDs offer fixed returns as per the prevailing interest rates. Interest rates are known at the time of investment, providing certainty of returns.
• Flexible Tenure: RDs offer flexibility in terms of tenure, allowing individuals to choose a maturity period ranging from six months to 10 years.
• Easy Investment: Opening an RD account is a simple process, and individuals can make regular deposits every month without the need for active management. SIP vs RD
• Senior Citizen Benefits: RDs often offer higher interest rates for senior citizens, making them an attractive investment option for retirees.