A Systematic Investment Plan (SIP) is an investment method in which you regularly invest a fixed amount in a mutual fund scheme. It is also known as rupee cost averaging. SIPs are simple, convenient, and flexible. You can start with as little as Rs 500 or Rs 1000. SIPs help reduce risk by staying invested in equities for a longer time and spreading investments over different periods to achieve a lower average cost.

Understanding Recurring Deposits (RD) vs Systematic Investment Plans (SIP)

Recurring Deposits (RD) are popular among investors due to their fixed return and low risk. RD is a preferred choice for traditional investors who want a safe option with guaranteed returns. Just like SIPs, you can make regular deposits into an RD and earn interest. The tenure of an RD ranges from 6 months to 10 years, depending on your preference. You can open an RD online through internet banking or visit your nearest bank branch or post office.

Difference Between RD and SIP

Returns:

The return on Recurring Deposits (RD) is usually between 7% and 8%. On the other hand, SIPs in equity-oriented schemes can offer an average return of more than 12% over the long term.

Options Available:

In RD, the options are limited to fixed or flexible returns. However, in SIPs, returns can vary based on the scheme and market conditions.

Risk:

RD is considered less risky with lower chances of default. The risks involved in RD are generally low yield and tax-related risks. According to SBI Securities, the risk of default in bank RDs is minimal. In contrast, SIPs involve multiple risks, such as interest rate risk, market risk, business risk, and more.

Tenure:

RD has a fixed tenure, ranging from 6 months to 10 years. SIPs, however, do not have a fixed lock-in period, except for ELSS, which has a 3-year lock-in. There may be an exit load of 1 year, but SIPs generally benefit from long-term investments, ideally more than 7-8 years for better results.

Liquidity:

RDs can be withdrawn prematurely, but a penalty will be charged, reducing the returns. On the other hand, SIPs can be withdrawn at any time without penalties. However, early withdrawal from SIPs may attract an exit load.

Which One Is Better?

While RDs are a safe option with fixed returns, SIPs provide more flexibility, better long-term returns, and higher chances of profits, especially in equity funds. SIPs are more suited for long-term financial goals and offer better growth potential than RDs. If you’re looking for higher returns over time, mutual fund SIPs have the edge over RDs.