SIP vs RD

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 SIP vs RD SIP, which will help investors make informed decisions by knowing the differences between SIP and RD.

What is SIP?

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.

Are you searching for the best mutual funds? Check out these different mutual fund categories to choose one of the best mutual fund schemes that have given better SIP returns compared to other funds for smart investing!

• Equity Mutual Funds
• Hybrid Mutual Funds
• Debt Mutual Funds
• Tax Saving Mutual Funds
• Thematic Mutual Funds
• Multi Cap Mutual Fund

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.

SIP vs RD - Product structure

Recurring Deposits (RD)

A Recurring Deposit involves selecting a tenure and monthly deposit amount that must be consistently invested throughout the chosen period. Generally, the tenure ranges from 6 months to 10 years, making RDs an attractive option for those looking for a low-risk investment. The interest rates for RDs are fixed and typically range between 7% to 8%. Senior citizens often receive a slightly higher interest rate. The advantage of RDs is that investors know the exact maturity amount, making it easier to plan for specific financial goals. For instance, if you are saving for a Rs. 3 lakh international trip, you can use an RD calculator to determine your monthly deposit, and the tenure needed to achieve this goal. However, a key drawback is that RDs are not tax-efficient, as the interest earned is added to your taxable income, and Tax Deducted at Source (TDS) is applicable if the interest exceeds Rs. 10,000.

Systematic Investment Plan (SIP)

A Systematic Investment Plan, or SIP, is a disciplined way of investing in mutual funds where a fixed amount is contributed at regular intervals, such as monthly or quarterly. SIPs offer a structured approach to investing without requiring a large initial sum, making them accessible to a wide range of investors. One of the major benefits of SIPs is the ability to leverage rupee cost averaging, where more units are bought when prices are low, reducing the average cost per unit. Additionally, SIPs allow for diversification by spreading investments across various mutual fund schemes, thereby managing risk and potentially improving returns. This strategy not only helps in mitigating the volatility of the market but also allows investors to start small and gradually build wealth over time

SIP vs RD - Key differences in a comparison table

Systematic Investment Plan (SIP) and Recurring Deposit (RD) both serve as

favored savings schemes for investors aiming to build a corpus. In both, investors can make monthly contributions to amass funds. Understanding the distinctions between SIP and RD is pivotal for informed financial planning. Explore our detailed table comparison to discern the key disparities between SIP and RD efficiently.

The points of difference are as follows:

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.

Benefits of SIP

Listed below are some 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.

Benefits of RD

Listed below are some 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.

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 mutual fund 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 or mutual fund calculator to compare the funds on the Bajaj Finance platform.

Conclusion

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.

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