Recurring Deposits – In a Recurring Deposit scheme, the individual has to first choose the tenure and monthly deposit amount. Once the plan starts, the investor must deposit the amount every month over the tenure. Generally, the tenure varies from a minimum of 6 months and thereafter in addition of 3 months to a maximum tenure of up to 10 years. Recurring Deposit proves to be gentle on one’s pocket given that the investor decides the amount and also the risk is considerably low.
Systematic Investment Plan – A SIP can be chosen by investing in mutual funds. In a SIP, the investor has to deposit a small sum every month or every quarter and the amount of investment can be as low as Rs. 500. If you choose a mutual fund scheme and invest in SIP, based on the plan that you have opted for they will allocate your money in debt or equity. In recent times, equity mutual funds have generated good returns which have been in excess of recurring deposit or fixed deposit schemes. The returns generated by SIP mutual funds have been around 12% to 22% in the last 5 to 10 years. One of the main disadvantages of SIP lies in the fact that even if you keep depositing the amount, nothing can be promised and if the stock markets crash, you might end up losing more than what you get. Also, you will have to hold the fund for a long time to get good returns.
Which is Better Systematic Investment Plan Or Recurring Deposit
| Factors | Recurring Deposit (RD) | Systematic Investment Plan (SIP) |
|---|---|---|
| Investment Scheme | In a RD scheme, you will have to invest in a deposit plan that will give you fixed rate of returns. You can also opt for flexible recurring deposit scheme if you are looking for more flexibility. | In a SIP for mutual funds, you can choose between debt or equity type of funds depending on your risk capability. |
| Risk Factor | Recurring Deposits are not prone to risks and is one of the safest form of investment. | Returns that you can expect from the SIP are variable. There can be a risk of capital and returns depending on the stock market. But, recent data shows us the SIP gives good returns if held for a long period of time. |
| Investment Type | In a Recurring deposit scheme, the investor has to deposit a fixed amount every month. | Systematic Investment Plan is a way to put your money on mutual funds. Investment can be done on a periodic basis – daily, weekly, monthly or quarterly. |
| Returns | As the rate of interest is fixed in a recurring deposit scheme, the return is also fixed and known at the time of investment. | The returns from a SIP for mutual funds is dependent on debt and equity markets and is also based on the fund scheme chosen by the investor. |
| Liquidity | Recurring Deposit is liquid but premature withdrawal or closure will attract penalty charges. | In terms of liquidity, a SIP is better when compared to RD. SIP can be closed and the money can be withdrawn without any penal charges. |
| Taxation | Recurring Deposit amount or the interest earned on it are not exempted from tax. | SIP investments and returns are exempted from tax only when invested on Equity Linked Savings Scheme (ELSS) funds. |
| Instalment Frequency | Recurring Deposit usually come with monthly instalments | SIPs offer flexible instalment plans of daily, weekly, monthly, quarterly etc. |
| Investment Goal | Recurring Deposits usually serve short-term savings goal and do not help in long-term wealth growth. | SIPs can help in all kinds of investments goals, whether short- or long –term, depending on the frequency of investment, funds chosen and other factors. |