How the right mix of SDP and SIP can help grow your investment?

Here is how you can invest in SIP and SDP to grow your investment with a lesser risk.
4 mins
14 Oct 2022

Systematic Deposit Plan (SDP) and Systematic Investment Plan (SIP) go hand in hand as both provide you with an opportunity to invest regularly. However, SDP ensures you fixed returns, and SIP offers comparatively higher returns but is subject to market fluctuations.

Hence, it is essential to analyse and make the right mix of both to take out the best of both forms of investments.

1. How is SIP different from SDP?
SIP is a way to invest in Mutual Funds starting from a minimal amount at regular intervals. These intervals can be monthly, quarterly, half-yearly, or yearly. This option is way better for those who do not have a lump sum amount to invest in the market. Market professionals manage these investments, generating better returns, and reducing the risk of failure. However, they are still subject to market fluctuations.

SDP is similar to a fixed deposit, as once the deposit is made, for the entire tenure of your deposit the interest rates remain the same. Just like SIP, SDP allows you to invest a small amount on a regular basis. Here, each deposit that you make acts as an independent FD. You also get to enjoy the prevailing interest rate when you make every deposit.
More on SDP

2. Returns on SIP and SDP
SIP and SDP both works on the power of compounding, giving exponential growth to your investments. For instance, if you want to start investing with Rs. 5000 per year for five years. Let us consider an average interest rate to be 10%. If interest is not compounded, your total interest earned would be Rs. 500 per year and Rs. 2500 over five years. The total amount that you earn will be Rs. 7500 after five years.

When the interest is compounded, your first-year interest of Rs. 500 adds to your principal amount. In the following year, you will earn interest on Rs. 5500. Your total interest-earning will be Rs. 3052.55, making your total gain of Rs. 8052.55. In the case of compound interest, you earn interest not only on your principal amount but also on interest.

SIP allows you to begin with a minimum amount of Rs. 100, which you can also increase in future.

It offers various benefits as follows:
a) You can invest in tax-saving funds
b) No minimum or maximum tenure
c) An average return of 12% - 15% on longer terms

Since the FD rates are defined throughout the tenure and offer guaranteed returns, SDP is a more secure option. You can start an SDP from as low as Rs. 5000 and a maximum of Rs. 5 Cr. The tenure ranges from 12 to 60 months, offering the best returns of 7.50% p.a. at 44 months tenure.
More on Mutual Funds

3. Diversify your portfolio with SIP and SDP.
For young investors with less earning potential, investing directly in the money market is not an ideal option. If you want to begin your investment journey with a more secure option, this mix of SDP and SIP will help you better.

SDP offers two variants: Monthly Maturity Scheme (MMS) and Single Maturity Scheme (SMS). In SMS, you get your returns (principal+interest) amount on maturity at once. While in MMS, each deposit matures on a different month based on the tenure chosen. This is how you can grow your investment in a secure mode.

During this period of SDP investment, you can acquire good knowledge about the market's risks and conditions and become a little financially stable. Now, you can use the monthly maturity scheme and the monthly payouts from SDPs and directly invest them in SIPs to enjoy higher returns.

For instance, if you invest Rs. 15,000 for 44 months tenure and wish to make 37 deposits in SDP. Taking the start date of SDP as October 1, 2022, and the interest rate applicable to be 7.50% p.a. In MMS, you will start getting your payouts monthly after completing the tenure. You will earn an interest of Rs. 4,555 on each deposit (considering the same interest rate of 7.50% p.a.) The total monthly payout that you will be receiving after 44 months will be Rs. 19,555.

You can use these monthly payouts and start a SIP accordingly to maximise your gains. This strategy would help you enjoy the security of an FD as well as the higher returns of SIP.

Start an online Bajaj Finance SDP and take a step towards your balanced investment journey.

Click here to calculate your returns on SDP using Systematic Deposit Plan calculator.