SIP Vs RD: Which is a Better Investment Option?

For many investors, an ideal scenario is to be able to invest a small amount of money regularly rather than investing a lump sum amount at once. Two of the most popular options that meet this criterion are Systematic Investment Plans (SIPs) in mutual funds and Recurring Deposits (RDs).While both SIPs and RDs allow you to invest smaller sums regularly, they are significantly different from each other. If you are confused between the two, here are some major differences to help you decide-Some Major Differences Between SIP and RD

SIP is a method to regularly invest smaller sums into a mutual fund scheme of your choice. As you might know, there are many different types of mutual funds, such as equity, debt, liquid, ETFs, hybrid, and more. You can select a scheme from any particular category and start a SIP. Financial institutions offer RDs as an alternative to Fixed Deposits (FDs). Unlike FDs, where you invest a lump sum amount, RDs allow you to invest smaller sums over the selected tenure regularly.

Another vital difference between the two is their returns potential. With SIPs in mutual funds, you can generally earn a higher rate of returns. On average, equity funds can generate returns of up to 12%-15% per annum and even more. The same for debt funds is around 9%-10%.Financial institutions regularly adjust the RD interest rates. Currently, some of the top institutions offer interest rates of up to 7% per annum. But the rate also varies as per the duration you select for your RD investment.

The higher returns potential of SIPs in mutual funds also means a higher level of risk. With mutual funds, the risk level can considerably vary between fund categories. Generally, equity funds are known to be the riskiest, with fixed-income funds being the least risky. But ultimately, the returns from any mutual fund depends on market conditions in some way.In comparison, RDs are very safe. The returns do not depend on market conditions. The interest rate promised by the financial institution when opening an RD will remain the same throughout the tenure.

SIPs are highly flexible. You can start with as little as Rs. 1,000 in any scheme of your choice. Frequency options range from weekly, monthly, quarterly, bi-yearly to yearly.RDs also allow you to begin investing with only Rs. 500. Investment frequency is generally monthly. However, this can vary between financial institutions.

Another vital aspect when comparing SIP vs RD is taxation. With SIPs, you’ll be required to pay Long-Term Capital Gains (LTCG) tax and Short-Term Capital Gains (STCG) tax as per the type of fund you select and the duration for which you remain invested.However, Equity-Linked Savings Scheme (ELSS), a type of equity mutual fund category, is eligible for a tax deduction of up to Rs. 1.5 lakhs under Section 80C of the IT act.With RDs, the interest you earn is considered part of your taxable income. TDS will be deducted by the financial institution in which you have your RD account if the interest income in the financial year is more than Rs. 10,000.

The selection between the two depends on you, your investment objective, and risk profile. If you are looking for an investment option with a higher returns potential and do not mind the market-linked risks, you can start a SIP.But if you are a risk-averse investor who wants to earn fixed risk-free returns, you can go ahead and open an RD account.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.