If you’re unsure about whether to invest in a Recurring Deposit or SIP, we’ll list out the differences between the two so you can make an informed decision.
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 sum 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 huge one-time investment opening a RD, PPF or starting a SIP are the most preferred options.
Additional Reading: Introduction to iSIP
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. A Recurring Deposit has proven to be gentle on the pockets of investors since the investor decides the amount and the risk is considerably low.
Interest rates for Recurring Deposits are decided based on the tenure and deposit amount. The rate of interest for a Recurring Deposit generally varies from 7% to 8% and senior citizens are offered a higher rate of interest. Recurring Deposit accounts can be opened at banks or post offices.
Unlike a SIP, with an RD you will know how much to expect at the end of the tenure. For example, if you want to save a corpus of Rs. 3 lakhs for an international trip, you can use a Recurring Deposit 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 that it isn’t tax efficient. Interest income from your RD is added to income for declaring tax liability and TDS will be applicable on the RD interest if it exceeds Rs. 10,000.
Additional Reading: Top 5 Recurring Deposit Accounts For 2018
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.
Differences Between SIP and Recurring Deposits
| 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 forms of investment. | Returns that you can expect from SIPs are variable. There can be a risk of capital and returns depending on the stock market. But, recent data shows us that SIPs give 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 in 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. |
Additional Reading: 4 Reasons Why You Should Adopt The SIP Route When Investing
There you have it! Now you know the salient differences between a Recurring Deposit and a SIP. This should help you make an informed decision when you decided to take the plunge and invest in one or the other.