SIP vs RD : Which Is Better?

Systematic Investment Plans and Recurring Deposits are popular financial instruments among investors who want to create wealth over a long period. With both SIP and RD, you can set aside a percentage of your monthly income and earn a good return on it to achieve your financial goals.

Understanding Systematic Investment Plan

With SIP, you can invest in mutual funds at fixed regular intervals with as little as Rs. 500. Depending on your risk appetite, you can choose to invest in equity, debt, or hybrid funds. Additionally, several sources highlight that SIP generates as high as 12% to 22% returns p.a. over a long period, which is higher than the returns on a Recurring Deposit. Investing in SIP also guards you against the risk of market volatility as you spread your investment across multiple stocks. 

Understanding Recurring Deposit

A Recurring Deposit is an investment scheme that helps you save for your future. Financial institutions offer RD as a term deposit where you can choose the tenure and the monthly investment amount. Usually, the tenure of RD ranges between 6 months and 10 years, with interest rates varying from 5% to 9%. In India, RD is a popular investment tool, as it offers a fixed rate of interest and is risk free. On the maturity of your RD, you will receive the lump sum amount along with the interest. 

SIP vs RD: Which is better?

Now that you have understood the meaning and difference between SIP and RD, let's look at the different parameters that you should evaluate to choose the investment plan that suits your requirements.

1. Type of investment scheme

SIP gives you the option to invest in different types of mutual funds based on your income and risk appetite. An RD does not give you multiple investment options and has a fixed interest rate. 

2. Risk Involved

As SIPs are directly linked to the market, they can be volatile. However, you can offset this risk by investing for a long-term. RDs, on the other hand, are safer and unaffected by market volatility. 

3. Frequency of investment

SIP allows you to make weekly, monthly, or quarterly investments based on your choice. RD does not offer flexibility in the frequency of investment and requires a fixed monthly deposits.

4. Liquidity

You can withdraw money from SIP without any exit load after one year of investment. However, to close an RD before its maturity, you will have to bear pre-withdrawal charges. 

5. Taxation

With SIP, you can enjoy tax benefits under Section 80C by investing in ELSS funds. However, RD is not tax efficient, as you will have to pay taxes on the returns depending on the applicable tax slab.

6. Suitability

SIP is suitable for conservative as well as aggressive investors. But RD is more suitable for risk-averse investors.

7. Investment objectives

SIP is ideal for meeting both your short and long-term goals. RD does not contribute toward wealth creation in the long-term and is more suitable for meeting short-term goals.

To conclude

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