SIP Vs RD: Which is Better for Investment

Now a day everybody has heard about the phrase ‘Systematic Investment Plan or SIP’. But, there is a limited view what actually SIP is. People have also doubt in mind that how it’s different from recurring deposit or RD. Are they not same? In this article, what are SIP and RD and what are their differences, SIP Vs RD.


What is SIP?

Systematic Investment Plan (SIP) is an investment option for investing in Mutual Fund. Investors can make very small deposits starting from Rs 500 per month. You will be able to save a big amount just by saving in a SIP over the years. If someone is investing from the last 15 years via SIP of Rs 1000 per month in the Birla Sun life Frontline Equity Fund, the invested value is now Rs 7.36 lakh. The Return on Investment is more than 22%.

Know More: Features and Benefits of Systematic Transfer Plan (STP)

What is RD?

Recurring Deposit or RD is also a small savings scheme by which you can invest monthly. Here, the investment fetches a fixed return set by the banks or respective financial institution. The return ranges between 6%-8% which is very low compared to the mutual fund.

The RD can be done for tenure from six months to as long as 10 years. RD can be opened at post offices and banks. The customers who have internet banking facility can open and close a recurring deposit instantly from their internet banking login.

Also Read: Post Office Savings Schemes – Features & Interest Rates

Return on Investment of SIP vs RD

The best way to compare two financial products is the how much return they give. As I have already given an example above that an investment in equity diversified SIP can give more than 20% return. And Recurring deposit in a bank can give you 7%-8% return. But, remember that the return from a mutual fund is not guaranteed and the past return does not assure you the future return. In the other way, RD can give you the guaranteed return.

Financial experts are not considering the RD as an investment option as it cannot beat the inflation whereas equity is giving the returns over the several years which can beat the inflation and grow your money over the long term. Five years investment in an ELSS fund, Axis Long Term Equity gives a return of more than 20% annually.

Income Tax Benefit:

There is another aspect i.e. applicability of income tax on the investment which also plays an important role for good net return on investment. The long-term capital gain over an equity mutual fund is completely tax-free. Some of the equity mutual fund under ELSS category also gives you the tax benefit under section 80C of income tax. ELSS has the shortest lock-in period of three years among the income tax exempted investments.

Also Read:  Difference between ULIP and SIP-Which is the Best

The recurring deposit does not have any income tax benefit in any of the steps. It does not fetch income tax benefit at any of the stages during investment, interest accumulation and maturity. Moreover, TDS of 10% is deducted when the accrued interest in a year is more than Rs 10,000.

TDS deduction does not relieve you from showing the income tax return. You have to show the balance income tax based on the accrued interest you have in a financial year.

What to select SIP Vs RD?

Now, the question is what you will select for your investment SIP or RD or SIP and RD both. If you have a short term goal which you have to achieve within three to five years, consider RD as the investment option because RD fetches a guaranteed return. Refer a separate post to explore more ways of short term investment options.

SIP in an equity mutual fund is good when you can stay invested for long term. If you invest in a mutual fund for short term goal, you may have to withdraw the investment when it is lower than your invested money. Post office recurring deposit accepts the minimum investment of Rs 10 per month and it has the facility of compounding the investment quarterly. Those who want assured return can invest in the post office recurring deposit.

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