Returns from RD are fixed, but you can earn similar or slightly higher returns in a debt fund SIP. Photo: iStock
A lot of people plan to accumulate funds for investment, but find it difficult to save enough. It makes sense for such investors to make small investments regularly—monthly or quarterly. Two instruments—recurring deposits (RD) and systematic investment plans (SIP) in mutual funds—can help do just that. However, these instruments are very different from each other and cater to totally different sets of investors.
What are these?
RDs: They fall in the category of debt products. You can open an RD with a bank or post office and choose a fixed amount to invest every month over a period of time. Typically, you can choose between periods of 12 months and 120 months.
You get a fixed rate of return on RDs, which depends on the amount of investment and tenure. RDs are meant for risk-averse investors or those with short-term fixed goals like going on a holiday. But being a debt product, RD may not give real returns or returns that beat inflation.
SIPs: You can invest in a mutual fund either through a lump sum or SIPs. Returns from an MF—be it debt-oriented, equity-oriented or hybrid—are not fixed. SIPs help tide over equity market volatility, as you average out your cost of investment by investing at different levels (high or low) of the market.
In SIPs, you can invest a fixed amount daily, weekly, monthly or quarterly for a period of six months to 99 years.
Which one to choose?
SIP scores over RD on many fronts like flexibility, liquidity, returns, tax implication, and ease of investing.
You can stop investing in an SIP whenever you wish. You just need to give an application, typically 15 days in advance, to stop an SIP; this won’t impact your return till date. If you stop an RD before its tenure gets over, you may not get the return mentioned at the time of investing.
Returns from RD are fixed, but you can earn similar or slightly higher returns in a debt fund SIP. While interest earned from RD is fully taxable for investors, gains from SIPs are comparatively tax-efficient. RDs work best for individuals in the lower tax bracket and those who want assured returns, while SIPs allow you to invest both in debt and equity systematically.