SIP or RD: Which Suits you Better?

Nishchay: What's wrong bro? Seems tensed! Nihal: I am confused, where to invest my money, in a SIP or a Recurring Deposit? Which is a better option for these to invest in? Nishchay: What’s there to get confused? You can check it on Google.

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Nihal: Yes, I can. But, yesterday I saw an advertisement of a famous public sector bank, which claimed to make any individual a millionaire in just 10 years. And, the icing on the cake was that it was about an investment of Rs. 550 per month only.

Nishchay: Bro, there is no rocket science here. That bank was just trying to draw the attention of people to RD schemes.

Nihal: Then should I invest in SIP?

Nishchay: I would suggest before drawing any conclusion, you must compare both and understand the process of returns.

Nihal: Yeah, that's a great idea. Let me check it on the internet and then I will decide where I should invest.

Looking at this conversation, you must have got an idea what this tête-à-tête is about? So, in order to solve the same riddle, we have crafted this article to make you understand the difference between SIPs and Recurring Deposits and their respective benefits.

Let’s begin with understanding what RDs and SIPs are:

What are Recurring Deposits?

A Recurring Deposit, popularly known as RD, is a unique term deposit scheme offered by the banks. RD is a tool of investment that allows you to earn decent returns on your investments if you have an ability to make regular deposits. The RDs come with flexibility and the ease of use to you with a component of interest and regular deposits. You can pick a certain amount every month, making sure that you have enough income in case of an emergency, with the RDs giving you a decent interest in your investment. You can consider it to be an ideal saving cum investment option, given that the Fixed Deposits are rigid and are not considered ideal options for short-term investment.

What are SIPs?

SIPs are the plans where you can invest a small sum of money in the market on a quarterly/ monthly basis. Theoretically, they are same as recurring deposits by which a fixed amount is invested regularly. Systematic Investment Plan, as the name suggests is a systematic approach to manage your investments. The amount of SIP set aside by you is based on your certain needs.

Putting your money in a SIP is similar to plant a seed and see it grow to a big tree, which bears sweet fruits in a matter of few years.

RD vs. SIP-The Product Structure:

Recurring Deposits:

In Recurring Deposits, you have to first select the amount of monthly deposit and the tenure. After the inception of the RD scheme, you must deposit the sum decided every month over the period of time. Usually, the duration differs from 6 month of a minimum tenure and henceforth in addition of the three months to up to a maximum tenure of 10 years. RD is gentle on your pocket provided that you decide the sum to be invested. Moreover, risk is significantly low.

The rates of interest for Recurring Deposits are dependent on the deposit amount and its tenure. The interest rates for RD usually differ from 7 percent to 8 percent; however, a higher interest rate is offered to the senior citizens. You can start a Recurring Deposit at any bank, be it public sector bank or a private bank, and post office. Unlike the SIP, in Recurring Deposits you will know the amount to be received by you at the end of the tenure. For instance, if you wish to reserve a corpus of around Rs. 3 lakhs for your dream international trip, you can make use of RD Calculator to know the amount to be deposited every month and the number of years for which you have to save Rs. 3 lakhs.

One of the key drawbacks of RDs is the fact that this scheme is not tax efficient. Income generated from a RD scheme is summed up to the income that you declare for tax liability and a TDS is applied on the RD interest if the amount exceeds Rs. 10, 000.

People Also Read: sip calculator

Systematic Investment Plans:

You can choose a SIP by making investment in mutual funds. In a Systematic Investment Plan, you have to deposit a small amount on a monthly or quarterly basis. The sum of investment can be just Rs. 500. If you pick a mutual fund plan and make investment in a SIP, depending on the scheme that you have chosen for they will allot your funds in equity or debts. Recently, it was noticed that equity mutual funds have produced better returns that have been in abundance of fixed deposit or recurring deposit plans. The returns produced by SIP mutual funds have been ranging between 12 percent and 22 percent in the last 5-10 years.

One of the key drawbacks of the SIP is the fact that though you deposit the amount regularly, you are promised nothing. Moreover, if there are crashes in the stock markets, you might lose more than what you receive. Also, you have to invest money for a longer period of time to reap good returns.

Which is a better option, Recurring Deposit or Systematic Investment Plan?

Factors Systematic Investment Plans (SIPs) Recurring Deposits (RDs)
Scheme of Investment In SIPs for mutual funds, you are given an option to choose between equity or debt type of funds based on your capability to handle risk. In RD plans, you have to put in your money in a deposit plan, which gives you a fixed return rate. You are given an option for flexible RD scheme if you look for more flexibility.
Risk SIPs give you variable returns. There can be risk of returns and capital based on the stock market. However, latest data have shown that SIPs give good returns if they are help for a longer duration.   RDs are one of the safest forms of investments and aren’t prone to risks.
Type of Investment SIP is a way to invest your money on a mutual fund. You can invest on a periodic basis, namely, quarterly, monthly, weekly or daily In a RD scheme, you have to deposit a fixed amount on a monthly basis.
Liquidity SIP is better option than RDs when talked about liquidity. You can close SIP and withdraw money without paying any penalty. RD is a liquid scheme but you can go for premature withdrawals. In case of closure you might have to pay penalty charges.
Returns Returns from SIP mutual funds are based on the equity and debt markets. Also, they are dependent on fund scheme you choose. The return from the RD is fixed as the interest rate is fixed.
Goal of Investment SIP can assist you in all sorts of investment goals, be it long or short term, based on the funds chosen, investment’s frequency, and other factors. RDs generally aid the short term saving goals and don’t serve the long term wealth creation.
Frequency of Investment SIP comes with flexible plans of quarterly, monthly, weekly, daily instalments. RDs generally offer monthly instalments.
Taxation The investment and returns from SIPs are exempted from any tax only if you invest on ELSS funds. RD amount or the interest generated on it is not liable for any exemption from tax.  

Past 10 Year annualised returns as on 01-11-2023

^Tax benefit are for Investments made up to Rs.2.5 L/ yr and are subject to change as per tax laws.

*All savings are provided by the insurer as per the IRDAI approved insurance plan.

Tax benefit is subject to changes in tax laws. Standard T&C Apply
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