Setting aside a fixed amount of money every month specifically for savings or investment is the best way to create wealth. Systematic Investment Program (SIP) in Mutual Funds and Recurring Deposits are two most popular ways to invest a fixed amount every month. In a SIP, the investor has to set aside small amounts of money either monthly or quarterly rather than having to invest a lump amount. In a Recurring Deposit scheme, a person deposits a fixed amount every month for a predefined period of time. At the end of the tenure, he gets back the interest and investment amount.
For people willing to invest a fixed amount every month rather than a single time investment of huge amount, opening a RD, PPF or starting a SIP are the most preferred options.
SIP Vs RD - Product Structure
Recurring Deposits - In a Recurring Deposit scheme, the individual has to first choose the tenure and monthly deposit amount. Once the plan starts, the investor must deposit the amount every month over the tenure. Generally, the tenure varies from a minimum of 6 months and thereafter in addition of 3 months to a maximum tenure of up to 10 years. Recurring Deposit proves to be gentle on one’s pocket given that the investor decides the amount and also the risk is considerably low.
Interest rates for recurring deposits are decided based on the tenure and deposit amount. The rate of interest for recurring deposit generally varies from 7% to 8% and senior citizens are offered a higher rate of interest. Recurring Deposit accounts can be started at banks or post offices. Unlike SIP, in RD you will know how much to expect at the end of tenure. For example, if you want to save a corpus of Rs. 3 lakh for an international trip, you can use a RD Calculator to decide how much you have to deposit every month and for how many years to save Rs. 3 lakhs.
One of the main disadvantages of Recurring Deposits is the fact that it is not tax efficient. Interest income from RD is added to income for declaring tax liability and a TDS will be applicable on the RD interest if it exceeds Rs. 10,000.
Systematic Investment Plan - A SIP can be chosen by investing in mutual funds. In a SIP, the investor has to deposit a small sum every month or every quarter and the amount of investment can be as low as Rs. 500. If you choose a mutual fund scheme and invest in SIP, based on the plan that you have opted for they will allocate your money in debt or equity. In recent times, equity mutual funds have generated good returns which have been in excess of recurring deposit or fixed deposit schemes. The returns generated by SIP mutual funds have been around 12% to 22% in the last 5 to 10 years. One of the main disadvantages of SIP lies in the fact that even if you keep depositing the amount, nothing can be promised and if the stock markets crash, you might end up losing more than what you get. Also, you will have to hold the fund for a long time to get good returns.
Which is Better Systematic Investment Plan Or Recurring Deposit
|Factors||Recurring Deposit (RD)||Systematic Investment Plan (SIP)|
|Investment Scheme||In a RD scheme, you will have to invest in a deposit plan that will give you fixed rate of returns. You can also opt for flexible recurring deposit scheme if you are looking for more flexibility.||In a SIP for mutual funds, you can choose between debt or equity type of funds depending on your risk capability.|
|Risk Factor||Recurring Deposits are not prone to risks and is one of the safest form of investment.||Returns that you can expect from the SIP are variable. There can be a risk of capital and returns depending on the stock market. But, recent data shows us the SIP gives good returns if held for a long period of time.|
|Investment Type||In a Recurring deposit scheme, the investor has to deposit a fixed amount every month.||Systematic Investment Plan is a way to put your money on mutual funds. Investment can be done on a periodic basis - daily, weekly, monthly or quarterly.|
|Returns||As the rate of interest is fixed in a recurring deposit scheme, the return is also fixed and known at the time of investment.||The returns from a SIP for mutual funds is dependent on debt and equity markets and is also based on the fund scheme chosen by the investor.|
|Liquidity||Recurring Deposit is liquid but premature withdrawal or closure will attract penalty charges.||In terms of liquidity, a SIP is better when compared to RD. SIP can be closed and the money can be withdrawn without any penal charges.|
|Taxation||Recurring Deposit amount or the interest earned on it are not exempted from tax.||SIP investments and returns are exempted from tax only when invested on Equity Linked Savings Scheme (ELSS) funds.|
|Instalment Frequency||Recurring Deposit usually come with monthly instalments||SIPs offer flexible instalment plans of daily, weekly, monthly, quarterly etc.|
|Investment Goal||Recurring Deposits usually serve short-term savings goal and do not help in long-term wealth growth.||SIPs can help in all kinds of investments goals, whether short- or long –term, depending on the frequency of investment, funds chosen and other factors.|