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SIP Versus RD Which Is the Superior Option?

Investing can be defined as the act of allocating a portion of your monthly income to an investment plan. This action is undertaken with the specific aim of accumulating long-term wealth. People want wealth in the long term so that they could take care of day-to-day expenditures. There are two types of investments. One option involves depositing a portion of your income into a bank account. This option is suitable for investors who are seeking an investment option that’s safe and does not involve many fluctuations. The other type of investment is a market investment. As the name suggests, this type of fund allocation is known for directing investments toward the market. But it is important to note that market investments are subjected to market volatility, making them risky. An example of a bank account is a recurring deposit or RD. Conversely, a mutual fund scheme is considered an example of a market investment. To invest in the market, there are two options or investment modes.

One of the investment modes is a systematic investment plan or SIP. In this mode, you could opt to invest in your mutual fund scheme regularly. RDs, on the other hand, require monthly deposits. But this question still needs to be answered, which is the better option between RD and SIP? But before answering this question, it is imperative to learn what they are. Continue reading if you want to learn what RDs and SIPs are.

Recurring deposits (RD):

A Recurring Deposit, which is referred to as RD, is a type of account that serves as an investment tool which allows you to earn decent returns by making regular i.e., monthly deposits. Recurring Deposits (RD) is known for providing account holders with the flexibility to deposit an amount of their choice each month into the account. Most of the banks in India and NBFCs are known for offering recurring deposit accounts with tenures ranging between 6 months and 10 years.

Are there any advantages of RD?

Here are some of the benefits of RD:

  • These accounts are suitable for short-term goals:

Recurring deposits are known for being suitable for all types of short-term goals. A short-term goal can be defined as a financial goal that’s just 1 to 3 years away. Hence, a recurring deposit can be used for purposes such as annual education expenditures for your loved ones, renovating your home, or a dream vacation.

  • It is easy to invest in these accounts:

In a recurring deposit account, you are required to deposit a fixed sum every month. This habit will build up a savings discipline. Moreover, RD schemes are known for offering guaranteed returns and the rate of interest. All that’s required on your part is to deposit a fixed sum every month. Also, this account is known for protecting your money from interest rate fluctuations.

Systematic investment plan (SIP):

A systematic investment plan is a mode of investment for a mutual fund and not an investment scheme. Through these plans, you can choose to invest in a mutual fund scheme at regular intervals. This makes SIPs different from the other mode of investment which is referred to as a lump-sum investment.

In these plans, you can pay for your mutual fund investment every month. To pay for that, on the banking app, you can add a standing instruction. This instruction enables automatic deductions every month on a date convenient for you. Thus, this feature ensures smooth payment for mutual fund investment on a specific date even if you were to forget it.

Are there any advantages of SIP?

  • SIPs make the most of the feature of compounding:

For mutual fund investments made through the SIP mode, it is possible for you to leverage the feature of compounding. In this feature, the returns generated by your mutual fund scheme are invested and reinvested constantly. Through this continuous cycle of investing and re-investing, you end up gaining profits over time.

  • These plans enable you to start with a low amount:

Another important reason behind the popularity of SIPs is that you can start with a very low investment amount. As there are changes in your financial conditions, you can either increase or decrease the required investment amount. As these plans make it possible for you to start with a low amount, they are not a burden on your wallet.

Which one to choose?

Before answering let’s compare the two:

Feature RD SIP
Safety These accounts are known for providing capital safety. You will get both, the principal and interest accrued on maturity Capital isn’t protected. Returns on mutual funds are dependent on the market conditions
Assurance Recurring deposits do give assured returns. The interest paid is fixed over the investment tenure. Later it is paid to investors upon maturity No guarantee of returns on mutual fund investments. That’s because returns are market-linked
Taxation Interest paid is taxed according to an investor’s income tax Long-term capital gains (LTCG) are levied

Now that you know the difference, it is time to answer the question. The answer is totally up to you. While making a choice between these two, it is advisable to consider things like your risk appetite, investment tenure, income slab, and investment goal. SIP may prove to be beneficial if you don’t mind taking risks. However, in case you don’t want to take risks, you can consider opening an RD.

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