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Personalized tax planning tips to help you save maximum taxes
Investment recommendations to generate inflation-beating returns
Simulator that adjusts tax savings as you change your investments in real-time
 

Systematic Investment Plan or Recurring Deposit – Which One is Better?

Updated on: Jan 21st, 2023 - 6:06:18 PM

7 min read

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Systematic Investment Plan (SIP) and Recurring Deposit (RD) are two popular saving schemes among investors as they allow long-term wealth creation.

 

In a SIP, you can set aside a small amount of money monthly or quarterly rather than investing a lump sum. On the other hand, an RD lets you deposit a fixed amount each month for a predefined duration. At the end of the tenure, you will get back the principal amount and the interest. Let’s know a little more about the products:

Recurring Deposits

In an RD scheme, you have to select the tenure and the monthly deposit amount. As soon as the plan starts, you must deposit the amount each month over your chosen tenure. Generally, you can select the tenure from a minimum of six months to a maximum of 10 years. Recurring deposits can be gentle on your pocket as they let you decide the time and also the risk is significantly low.

Benefits of RD

  • Guaranteed returns
  • Flexible time horizon
  • Easy investment
  • Senior Citizen benefits

Systematic Investment Plan

In a SIP, you can invest in mutual funds by depositing a small amount of money every month or quarter. The sum can be as low as Rs 500. Based on the scheme you have chosen, the mutual fund managers will allocate the amount in debt or equity. Equity mutual funds generate better returns than recurring deposits or fixed deposit schemes.

Benefits of SIP

  • Liquidity
  • Flexibility
  • Higher returns
  • Tax break
  • Market timing

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Difference Between Recurring Deposit and Systematic Investment Plan

Here a table with the distinctions between RD and SIP:  

 Recurring Deposit (RD)Systematic Investment Plan (SIP)
Interest ratesThe interest rates vary from 7% to 8%. Senior citizens are offered higher rates.Returns generated by SIP mutual funds have been 12% to 22% for the last 5 to 10 years.
Investment schemeThe deposit plan will give you a fixed rate of returns. Flexible RD schemes are also available.Choose between equity and debt funds depending on the risk capability.
ReturnsReturns are fixed and known at the time of investment.Returns depend on equity and debt markets and the fund scheme chosen.
TenureThe maturity date for RD can be from six months to 10 years.There is no fixed tenure for SIP. However, the minimum period is six months.
Risk factorRDs are not prone to risks and are a safe form of investment.Returns from SIP are variable as they depend on the stock market. There can be a risk of capital.
LiquidityRDs are liquid, but the premature withdrawal will attract fines.SIPs can be closed anytime with no penalty charges.
TaxationRD amount or the interest earned is not exempted from tax.SIP investments and returns are exempted from tax only of invested on ELSS funds.
Instalment frequencyRDs can come with monthly instalments.SIPs offer flexible instalment plans of daily, weekly, monthly, and quarterly.
Investment GoalGenerally for people looking for short term savings. Not great for long term wealth creation. SIPs can be ideal for short term, mid term and even long term investment goals. It depends on frequency of investment, type of funds, etc. 

You must invest in mutual funds and recurring deposits to allow your money to grow. You can invest in these tools to get good returns, based on your risk appetite. Once you have decided the investment plan, make sure you read the fine print thoroughly to understand the product.

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