RD Vs SIP: Know Which is the Better Investment Option

SIP Vs RD? Secure your future with the right investment choice. Find out which one is better for you now.
RD Vs SIP
3 mins
17 Feb 2024

Recurring deposits (RD) and Systematic Investment Plans (SIPs) are two popular options for retail investors in our country. Both investment options help to create wealth over a particular period.

It is a good idea to invest in various assets during market volatility and inflation because it ensures income stability. Some investors may be confused about whether to choose RD or SIP. This article will focus on important details of RD vs SIP, which will help investors make informed decisions.

What is SIP?

Before proceeding to answer, ‘Which is better—RD or SIP’, it is essential to have a clear idea about what SIP and RD are.

A Systematic Investment Plan (SIP) is a mode of investment in mutual funds. It allows people to invest small amounts at regular intervals. The frequency of SIP investment may vary, i.e., investors can choose to invest daily, monthly, quarterly, or annually. Generally, the minimum investment amount is Rs. 500 but it can be lower for certain mutual funds.

It is an ideal investment mode for beginner investors who lack financial discipline. Moreover, investors with a high-risk appetite with specific objectives in mind can consider SIP for long-term investments. There are over 1200 mutual fund schemes on the Bajaj Finance platform for investors to choose from to begin their SIP journey.

Benefits of SIP

  1. Easy access to funds: SIPs offer liquidity, allowing investors to redeem them at their convenience. Some funds, like overnight funds, permit redemption without exit loads after the seventh day.
  2. Flexibility in investment: SIPs provide flexibility in investment duration, amounts, and redemption. Investors can choose daily, weekly, monthly, quarterly, or annual investment intervals and adjust amounts as needed. Partial redemption is also possible, although selling within a year may incur an exit load, individually calculated for each unit.
  3. Potential for higher returns: By investing in diversified companies across sectors, SIPs offer the potential for better returns. The power of compounding systematically grows small monthly investments into significant sums over time.
  4. Tax benefits: Investing in Equity Linked Savings Scheme (ELSS) SIPs, designed for tax-saving purposes, can provide investors with tax breaks.
  5. Market exposure without timing pressure: SIP investments offer exposure to equity markets without the need to time the market correctly. Spreading investments over time reduces volatility compared to lump-sum investments, potentially leading to higher returns.

What is RD?

RDs are like SIPs because they have a periodicity of investments in common. These are recurring deposits at banks or post offices which people open for a particular tenure. People can invest in these accounts every month for tenures ranging from 6 months to 10 years.

Investors who wish to open RD accounts need to provide standing instructions at banks to debit fixed amounts from a savings account every month and credit them to an RD. Usually, the interest rate of a bank’s RD is the same as its term deposits provided that the tenure remains the same.

Benefits of RD

  1. Assured returns: RDs offer a fixed return throughout the investment period, known at the time of deposit. While interest rates vary among banks, once opened, the RD maintains a consistent interest rate for its entire tenure, ensuring investors a predictable return and making it a low-risk option.
  2. Flexible investment period: RDs offer terms ranging from six months to 10 years, allowing investors to choose durations that suit their financial goals. With fixed interest rates, investors can opt for short-term deposits without worrying about fluctuating returns.
  3. Simple investment process: Investing in an RD is straightforward, as it is accessible to anyone with a bank account. Many banks offer the convenience of setting up standing instructions online for automatic deposits, streamlining the investment process for investors.
  4. Senior citizen advantage: Senior citizens enjoy higher interest rates on RDs compared to other investors, offering them greater annual returns on their investments. This benefit ensures that senior citizens can maximize their earnings through RD investments.

Differences between SIP and RD

The points of difference are as follows:

Feature

Recurring Deposit (RD)

Account opening/ on-boarding

Can be opened at any bank through savings accounts; can be done in-person or online

Frequency of investment

Fixed monthly investment; no flexibility in investment frequency

Returns

Fixed returns; known beforehand

Tenure

Fixed maturity date; investments over a predetermined period

Liquidity

Highly liquid; early withdrawal may incur charges

Risk

Very safe; capital guaranteed as it's a bank account

Taxation

Taxed as per individual income tax slab rates


Similarities between Recurring Deposits and SIP

Recurring Deposits (RDs) and Systematic Investment Plans (SIPs) share some similarities:

  • Periodic Investments
    Both RDs and SIPs involve making periodic investments. In an RD, you deposit a fixed amount regularly, while in a SIP, you invest a specific sum at regular intervals, typically monthly.
  • Disciplined Saving
    Both RDs and SIPs encourage disciplined saving and investing habits. Regular contributions in these schemes help individuals set aside money consistently.
  • Risk Factor
    They are relatively low-risk options. RDs offer guaranteed returns, and SIPs in debt mutual funds are considered low risk compared to equity investments.
  • No Lump Sum Requirement
    Neither RDs nor SIPs require a lump sum investment upfront. This makes them accessible to individuals who may not have a significant amount of money to invest at once.
  • Flexibility
    RDs and SIPs offer flexibility in terms of the amount you can invest. You can choose an RD or SIP amount based on your financial capacity.

SIP or RD: Which is the better option?

The two important factors when choosing between RD vs SIP are their returns and risks. While RDs are secure investment options, mutual fund investments via SIPs carry market-related risks. But fund houses offer a variety of schemes with different risk levels.

While RDs generate fixed returns as per the interest rate decided by the bank, mutual funds hold the potential of generating much higher returns. This makes SIP investments suitable for investors willing to take some risks for market exposure. On the other hand, RDs are suitable for the most conservative investors.

It is not possible to say which the better investment option is because investors have different financial needs. It is recommended that people evaluate their needs before choosing SIP or RD.

Tips to choose the right investment option

Here are certain tips to help people make the right investment decisions:

  1. Knowing the reason for investment
    Identifying the reason for investment provides clarity and helps to narrow down the search for the appropriate investment option.
  2. Evaluating risk is important
    It is important to know how much risk a person can take. It will help them find the best investment options aligned with their risk-taking capacity
  3. Fixing the duration of investment
    It is important to choose an appropriate investment duration based on one's reasons for investment.
  4. Estimating return on investment
    It is important to evaluate the expected returns on investment. People should check whether it is a market-linked product or a guaranteed-return product and if it is aligned with their investment goals. If investors choose mutual funds, they must research thoroughly before choosing a scheme and use the SIP calculator to compare the funds on the Bajaj Finance platform.

To sum up, both RD and SIP share similar features but have their points of differences as well. When an investor wants to decide between RD and SIP, they must consider their risk appetite, investment goals, tenure, liquidity, and returns on investment. Use the SIP calculator on our platform to understand the returns you might get if you invest in SIP after you have mentioned your amount and tenure.

Although every investor’s needs are different, those with the lowest risk appetite may prefer RDs over mutual funds. Aggressive investors may prefer SIP investments in equity funds.

Calculate your expected investment returns with the help of our investment calculators

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Frequently Asked Questions

Which one should I choose, RD or SIP?

Your choice should align with your financial goals. If you want a safe, fixed return with minimal risk, choose an RD. For potentially higher returns with some risk, go for an SIP.

What are the returns offered in an SIP?

SIP returns can vary widely depending on the mutual fund's performance. Equity SIPs can typically offer higher returns, averaging around 12-15% annually, while debt SIPs can offer lower but more stable returns, around 6-8%. Investors are advised to do their own research before investing their hard earned money in any investment instrument.

What are the risks associated with an SIP and an RD?

SIPs in equity funds involve market risks, while RDs have no market exposure but may face reinvestment risk due to fluctuating interest rates.

Is an SIP better than an RD in terms of liquidity?

Yes, SIPs offer more liquidity as you can partially or fully withdraw your invested amount (subject to exit loads) at any time, whereas RDs usually have a fixed tenure.

What is the minimum deposit amount for an RD?

The minimum deposit amount for RDs varies for different financial institutes but typically starts at around Rs. 100 to Rs. 500.

What are the benefits of investing in SIP?

SIPs offer benefits like rupee cost averaging, compounding, and flexibility in investment amounts. They also provide access to professional fund management and a diversified investment portfolio.

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