SIP vs RD: The tenure of RD can be from 6 months to 10 years. Whereas, in case of mutual fund SIP, there is no lock-in period except in ELSS.
Systematic Investment Plan (SIP) is an investment strategy that involves regular investment of a small fixed amount in a mutual fund scheme. SIP is generally known to cost an average of Rs. SIPs are simple, convenient and flexible. You can start SIP with as little as Rs 500 or even Rs 1000. SIP is efficient in terms of reducing risk. A SIP reduces the risk by staying invested in equities for a longer period and spreading the investments over time frames to achieve a lower average value.
Recurring Deposit (RD) is very popular among investors. RD is a popular investment option for traditional investors that gives a fixed rate of return on savings with almost zero risk. Just like you invest regularly in SIP, you can also make regular deposits in RD and earn interest. The tenure of RD can be from 6 months to 10 years depending on your choice. Today you can open RD online by giving instructions to your bank on internet banking platform. This can also be done offline by visiting your nearest bank branch or post office.
Understand the difference between the two like this
- Typical returns on Recurring Deposits i.e. RDs are in the range of 7% to 8%, while SIPs on equity funds Equity Oriented Schemes can yield an average return of more than 12% over a longer time frame.
- The options in RD are relatively limited. You can choose either fixed returns or flexible return options, but in case of mutual fund SIP, returns can vary depending on the underlying scheme and market scenario.
- If we talk about risk, RD is clearly better than mutual fund SIP. Risks in RD may be low yields and tax risk. According to SBI Securities, the risk of default in Bank RD is very low. However, in case of mutual fund SIP, there can be many risks like interest rate risk, default risk, volatility risk, business risk, market risk etc.
- RDs have a fixed tenure, ranging from 6 months on the lower side to 10 years on the upper side. In case of mutual fund SIPs, there is no lock-in period, unlike ELSS which have a lock-in of 3 years. Generally there is an exit load of 1 year to avoid losing money, but ideally, a tenure of more than 7-8 years in an equity fund SIP can give better results.
- Talking about liquidity, RD can be withdrawn prematurely, but there is a penalty in this, which reduces the returns. However, in case of mutual funds, there are no charges for closing your SIP at any time. If you withdraw before a certain time, exit load will be applicable.
Who is next
- Sectors where mutual funds score higher than SIP, RD are that they are more flexible, more responsive to long-term goals and have greater potential for higher returns. In equity fund SIP, money is made with more effort than in RD. When it comes to your long-term goals and making money, mutual fund SIPs clearly score in the SIP vs RD debate.
