Which is Better: SIP or RD?

Systematic Investment Plan (SIP) of a Mutual Fund and Recurring Deposit of a Bank, both are considered good avenues for creating wealth for the investors. Generally, SIP (especially Equity SIP) is a long term instrument of wealth creation while RD is comparatively a short-term instrument of achieving some financial goal.

SIP stands for Systematic Investment Plan. It's a method of investing a fixed amount of money regularly, usually monthly, into a mutual fund. Instead of trying to time the market or invest a lump sum, SIP helps you build wealth gradually and consistently. It comes with following benefits,

• Rupee Cost Averaging: Smooths out market volatility by buying at different price points.
• Compounding Power: Your returns earn returns over time.
• Discipline & Convenience: No need to actively manage or time the market.
• Low Entry Barrier: You can start with small amounts, making it beginner-friendly.

A Recurring Deposit (RD) is a fixed monthly investment scheme offered by banks. You deposit a set amount every month for a chosen tenure and earn interest on it just like a Fixed Deposit (FD) but in smaller and regular installments. It has following features,

• Fixed Monthly Deposits: You choose an amount (e.g., Rs.500 or Rs.1000) to deposit every month.
• Tenure Options: Usually ranges from 6 months to 10 years.
• Guaranteed Returns: Interest rates typically range from 5% to 8%, depending on the bank and tenure.
• Compounded Interest: Interest is usually compounded quarterly.
• Safe Investment: Low risk, ideal for conservative savers.

Both SIP and RD do not require any lump sum investment and one needs to make a regular contribution during entire tenure. Both encourage consistent saving from the investors. Here, we will consider SIP as Equity SIP which is usually opted for long term investment by majority of investors to earn better returns.

Now, one may get confused as to which is better: SIP or RD? One may consider points mentioned below while deciding which one is better for him/ her:

(1) Returns

RD returns are fixed at the time of opening the RD account which are based on RD's tenure. In SIP, the returns are not fixed but they vary according to market and performance of fund manager who manages the fund in which one has invested in.

(2) Assured Earnings

If you invest in RD, the earnings are assured and there would not be any loss of principal. It has not relation with equity market. SIP earnings can never be assured one. Even you may lose a part of your principal in case fund and market have given negative returns.

(3) Risk Appetite

For risk averse persons, RD, no doubt, is a better option. For those who can take risk should go for investing in SIP.

(4) Comparing Returns

You can compare interest rates RDs of different banks. These interest rates are prevailing one which you will receive if you open RD account as on date.

You can also compare SIP returns of various mutual funds for different tenure. The difference here is that these returns/ interest rates are of funds' past performance and not the prevailing one. You will not receive exactly same returns which have been there in past.

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(5) Declaration of Tenure

In case of Recurring Deposit (RD), you need to declare the tenure while opening RD and you cannot make any changes in it after your RD account is opened. In case of SIP, you can declare the tenure initially and can change it any time and any number of time as per your wish.

(6) Premature Withdrawal

In RD, if you withdraw your funds before its maturity, you need to pay a penalty. In SIP, there is an exit load usually for a period of one year, after that you can withdraw anytime without any exit loan (penalty).

(7) Management of Funds

In SIP, the fund is managed by professional fund manager while in RD, interest rate is pre-declared and no such management is there.

(8) Taxation

RD interest income is not exempted from tax and the investor has to pay tax as per his/ her tax slab. SIP returns are tax efficient and come in either short term or long term capital gains taxation where the investor needs to pay lower tax as compared to that of RD.

(9) Age of the Investor

In RD, senior citizens get usually get 0.50% higher interest while in SIP there is no such provision.