Comparison is one of the first things often recommended when you go out to buy something. Whether purchasing a phone or picking an investment, comparing items allows you to assess the pros and cons and analyse the product thoroughly. Two popular contenders, Systematic Investment Plan (SIP) and Recurring Deposit (RD), may offer some similar benefits like systematic wealth creation, but they also significantly differ on many levels. Much like comparing smartphones before purchase, carefully evaluating these financial tools is essential to align your goals with the right strategy. This article aims to settle the SIP vs RD debate. Join us to understand these investment avenues better.
What is an SIP?
An SIP is a systematic and disciplined method to invest in mutual funds in India. Unlike traditional investment instruments, an SIP is not a standalone product but a method that enables you to make regular contributions to a chosen mutual fund scheme. SIPs offer you the flexibility to opt for your preferred frequency and amount, be it monthly, quarterly, or even weekly.
What is an RD?
An RD is a financial product offered by banks, non-banking companies and post offices. It provides a systematic method to deposit money at regular intervals and earn interest on your savings. Unlike a lump-sum deposit, RDs allow you to contribute a fixed amount of money periodically, such as monthly, quarterly, or as per the chosen schedule. The investment accumulates interest over time, and the maturity period of RDs typically ranges from six months to 10 years.
Now that you know the basics of these two investment avenues, let us observe some of their similarities and differences.
SIP vs RD – Similarities
Small investment value:
Both SIPs and RDs allow you to start your investment journey with a small value. You can select an amount as per your budget and goal.Flexibility:
SIPs are known for their flexibility. You can start, stop, or change your investment any time you want. Apart from an Equity-Linked Savings Scheme (ELSS) that has a three-year lock-in period, you can withdraw your money from open-ended schemes whenever needed. RDs are also flexible instruments. You can alter your investment value, change the term, etc., as per your evolving needs.Long-term focus:
SIPs and RDs maximise returns when invested for the long term. Both these instruments are ideal for long-term investing.Consistent savings:
SIPs and RDs are investment tools ideal for instilling financial discipline. They focus on consistent investments made over time and help foster saving habits.
SIP vs RD – Differences
Risk:
SIPs invest in mutual fund schemes and are inherently subject to market risks. The returns on SIPs are not guaranteed, and the capital invested is exposed to market fluctuations. However, the risk level can be managed by choosing different types of mutual funds, such as high-risk equity funds or relatively low-risk debt funds. On the other hand, RDs are considered low-risk products since they are not linked to the market. The interest rate is fixed, and capital safety is guaranteed.Tenure:
SIPs provide the advantage of flexibility in tenure. You can continue investing for as long as you want. However, RDs have a defined term, typically ranging from six months to 10 years.Liquidity:
SIPs generally offer better liquidity compared to RDs. You can close an SIP and withdraw your money from an open-ended scheme at any time, except for an ELSS, which has a lock-in period of three years. However, RDs have a fixed term and often involve pre-withdrawal charges or penalties in case of premature withdrawals.Tax:
ELSS is a tax-saving mutual fund scheme that offers tax benefits under Section 80C of the Income Tax Act, 1961. This allows you to avail of a tax deduction of up to Rs 1.5 lakh per annum under the old tax regime. However, all mutual funds are subject to short and long-term capital gains taxes as per prevailing tax laws. RDs, in contrast, do not offer any tax benefits. The investments do not qualify for any tax deductions, and the interest earned on RDs is taxable as per your tax slab.
To sum it up
In the SIP vs RD debate, both options emerge as formidable contenders. Each of these caters to diverse financial needs. While SIPs offer market-linked returns, RDs provide a steady and secure return. However, they both offer flexibility and accessibility and help save regularly. It is crucial to align your investment choice with your goals, risk tolerance, budget, and time horizon to decide between an SIP and an RD.
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MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.
