Which is better: SIP or RD?

Find out more about SIP and RD as investment options to create a diversified portfolio.

3 mins
10 July 2023

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.

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.

Differences between SIP and RD

This section will focus on the differences between RD and SIP. The points of difference are as follows:

  • Account opening/ on-boarding
    People can open RD accounts at any bank through their savings accounts. They can open this account either by visiting the bank or through online processes.
    To start a SIP, investors would need to choose the most suitable mutual fund. There are multiple ways to start a SIP. This might include visiting the nearest Bajaj Finance branch, online selecting the fund on the Bajaj Finance website or downloading the Bajaj Finance app to invest.

  • Frequency of investment
    People can invest a fixed amount every month in RDs. However, in SIPs, people can invest a small amount on a weekly, monthly, quarterly, or yearly basis at the investor's convenience.

  • Returns
    RD returns are fixed, so investors will know exactly how much their investment will generate. On the contrary, SIP returns are market-linked.
    Financial experts have observed that returns of SIP investments in equity schemes can be as high as 12% to 14% per annum. For debt funds, the returns generated can be as high as 8% to 9% per annum. However, in the short term, the returns can fluctuate, and investors may even incur losses.

  • Tenure
    There is a fixed maturity date for RD accounts. In other words, people invest in RDs over a fixed maturity period.
    On the other hand, for SIPs, people can invest in an open-ended mutual fund over any timeframe. Only a few mutual funds, including close-ended funds and ELSS (equity-linked savings scheme), have lock-in periods.

  • Liquidity
    RDs are highly liquid but investors may have to pay withdrawal charges if they wish to make an early withdrawal.
    SIP investments in mutual funds are less liquid than RDs. Fund houses levy exit loads on certain mutual funds if investors withdraw their amount before the completion of a certain time.

  • Risk
    RD accounts are very safe because these are bank accounts. Investors do not have to fear the loss of capital as their returns are guaranteed.
    But mutual fund investments are associated with high risk because the returns are market-linked. In other words, there is a risk of loss of capital. Investors can always refer to the Riskometer on the individual fund pages of mutual fund schemes on the Bajaj Finance platform to compare risk.

  • Taxation
    The returns from RD investments are taxed as per an individual’s income tax slab rates.
    On the other hand, mutual fund investments are subject to capital gains taxation, i.e., short-term capital gains (STCGs) and long-term capital gains (LTCGs). Tax deductions of up to Rs. 1.5 lakh is available only for ELSS investments.

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.