Category : Investing Guides August 14, 20245 minutes read
SIP vs RD: SIP or Systematic Investment Plan is a systematic approach to investing, wherein, investors allocate a small, pre-determined amount of money to a specific mutual fund scheme at regular intervals. In recurring deposits, investors can make regular deposits and potentially earn returns. SIPs and RDs may be suitable for investors looking to systematically save their money and potentially earn returns on their investments. The key difference between SIP and RD is their risk level and potential for wealth creation. SIPs can be started in a variety of different mutual funds, including tax saving schemes. Investors can choose between various schemes such as debt, equity, hybrid, etc., with varying levels of risk. Contrarily, RDs are generally short-term and low-risk and may be suitable for senior citizens, salaried individuals, or for emergency funds. It gives a safe fixed expected return based on the interest rate chosen. It also has 10% tax deductions on 10,000 rupees income per annum.
Introduction
While choosing between different investment avenues, investors may often compare SIP vs RD. These are similar investment options, however, they offer different benefits and may be beneficial for different sets of investors. The key difference between SIP and RD is their investment duration and risk. Generally, Systematic Investment Plans are suitable for long-term financial goals, while RD may be suitable for short-term goals.
SIPs can be started in a variety of mutual fund schemes such as equity, debt, hybrid, fund of funds, etc. As a result, the risk level in the scheme may vary. For instance, SIPs in equity funds may be more risky, whereas SIPs in debt funds may have a lower level of risk. While mutual funds have varying maturity periods, SIPs are generally suitable for investors with a long-term investment horizon.
Recurring Deposits are a short-term investment option wherein, investors can regularly make deposits and potentially earn returns. RDs may have lesser market risk and fixed returns on investments based on the interest rate that is defined when an investor starts their RD.
Investors must analyse SIP vs RD and their benefits before investing. To build a well-rounded financial portfolio, aligning your risk appetite and objectives with your investment avenues is vital.
In Systematic Investment Plans, the investor can invest fixed amounts of money at different intervals. These intervals can either be weekly, monthly or quarterly. There is no fixed time limit for lock-in periods of SIPs. Hence, you have the flexibility to choose your tenure of investment. This is unlike RD where you can only invest for up to 10 years. SIP gives investors the flexibility of investing small amounts of money over small intervals. One key difference to consider when comparing SIP vs RD is the variety of fund options. Investors can invest in different types of funds with varying risk appetites and investment horizons. Moreover, SIPs offer the option of top-up, flexible, and perpetual SIPs.
SIP, once signed up for, automatically deducts money from your account at the intervals chosen by you. As a result, making regular investments is easy and convenient.
Features of SIP:
Liquidity: Most SIPs are liquid and hence, you can withdraw your invested money at any time. Some funds such as ELSS may have a lock-in period, in such cases, SIPs have a lock-in period as well.
Flexibility: SIPs are highly flexible. You can top-up your investment or stop your SIP installments. You can choose the number of installments, the investment amount, and the frequency of investments.
Tax-saving: SIPs started in Equity Linked Savings Schemes (ELSS) can offer tax-saving benefits. This enables investors to claim tax deductions of up to 1.5 lakh under Section 80c of the Income Tax Act, 1961. Therefore, investing in ELSS via SIPs can be advantageous for your savings, making it a favorable investment option.
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Varying levels of risk and return: One important difference to consider when comparing SIP vs RDs is the variety of options available through SIPs. Investors can analyse risk-levels of different funds and identify a scheme that may suit their goals. Although SIPs are subject to market risks, they may potentially provide higher returns due to their diversified nature. Some mutual funds such as equity funds may be a high-risk-return investment, whereas other schemes may offer low risk and returns. Investors can choose to invest in a scheme that meets their goals and risk-appetite.
Subject to market fluctuations: The impact of market fluctuations is a key factor to consider when analysing SIPs vs Recurring Deposits. Mutual funds that allocate investments to equities are exposed to market fluctuations. Similarly, funds investing in other securities are also susceptible to market risks, interest-rate risk, inflation risk, credit risk, etc.
Diversification: SIP investments in mutual funds are diversified. You can invest in equity, debt funds as well as hybrid funds. Diversification may help reduce risk; underperformance in any one sector may be lessened due to diversification.
In Systematic Investment Plans, the investor can invest fixed amounts of money at different intervals. The features of Systematic Investment Plans (SIPs) include:
- Liquidity: Money from a SIP can be withdrawn at any time.
- Flexibility: SIP instalments can be stopped or topped up whenever required.
- Tax-Saving: SIPs started in ELSS funds offer tax-saving benefits under Section 80C of The Income Tax Act, 1961.
- Varying levels of risk and return: SIPs are available in a variety of different mutual funds. Investors can analyse risk-levels of different funds and identify a scheme that may suit their goals.
- Subject to market fluctuations: SIPs in mutual funds are vulnerable to market fluctuations; returns are not guaranteed.
- Diversification: SIPs in mutual funds are a diverse investment option as they may invest in equity and debt securities.
Banks offer Recurring Deposits (RDs), which are savings options where investors deposit a set amount on a regular basis for a predetermined length of time. These deposits offer a dependable means of saving money because they usually have a set period and interest rate. The investor receives both the principal amount and the accrued interest at the conclusion of the term. People who want guaranteed returns and a disciplined approach to saving money like RDs. To compare and analyse SIPs vs RDs, let’s explore the features of RD.
Features of RD:
Low or no risk: These investments are highly safe as they have low or no risks. One category of fixed-income investment is recurring deposits. Upon maturity, it promises a guaranteed return. Prior to making the investment, the interest rate is known. Furthermore, there is no fluctuation in interest rates throughout the duration of the deposit.
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Easy and convenient: RDs are simple and convenient short-term savings options with flexible investment criteria. You can sign up for them through a bank and invest the amount that you wish to without any limitations.
Fixed tenure: Investors can choose to invest from 6 months up to 10 years at the beginning of the investment.
Benefits for senior citizens: One vital distinguishing factor to consider while comparing SIP vs Recurring Deposits is the potential benefits for senior citizens. RD is highly beneficial for senior citizens as it may give them a higher interest rate on top of the already available interest rates.
Lack of liquidity: Due to their low liquidity, RDs only allow for the withdrawal of funds at maturity. Certain banks may charge fees for early withdrawals, while others might not allow them at all.
Banks offer Recurring Deposits (RDs), which are savings options where investors deposit a set amount regularly for a predetermined length of time. The features of Recurring Deposits (RD) include:
- Low or no risk: On maturity, recurring deposits have a guaranteed return. Interest rates do not fluctuate.
- Easy and convenient: RDs are simple and convenient short-term savings options with flexible investment criteria.
- Fixed tenure: Investors can choose to invest from 6 months up to 10 years.
- Benefits for senior citizens: RD is highly beneficial for senior citizens as it may give them a higher interest rate.
- Lack of liquidity: RDs only allow for the withdrawal of funds at maturity. Certain banks may charge fees for early withdrawals
| Parameters | SIP | RD |
| Meaning | SIP is an investment vehicle that many mutual funds provide to investors. It is a systematic investment plan. Instead of making a single, lumpsum payment, investors might contribute a fixed amount to a mutual fund through a systematic investment plan (SIP). | Recurring deposits are short-term. You can invest for up to 10 years with a fixed interest rate. |
| Suitable for | Debt funds may be a suitable choice for cautious investors. SIPs offer low-risk solutions that appeal to those who like them. Higher risk-tolerant, aggressive investors might choose equity funds. Investors seeking diversity may be suitable for SIPs in hybrid funds. | Those looking for safe investments with guaranteed returns, who are also low-risk investors and have limited savings, such as salaried individuals, like RDs. They are especially appropriate for people who have immediate financial objectives. |
| Tax saving | SIP can provide tax benefits with the ELSS scheme which provides 1.5 lakh tax deduction under Section 80C of the Income Tax Act, 1961. | If your income is more than 10,000 per annum, you can get up to 10% tax deductions. |
| liquidity | Highly liquid. Can be withdrawn at any time with certain exit loads. | Not liquid. Has exit loads and penalties from certain banks. |
| Investment frequency | Can invest weekly, monthly or quarterly in these funds, | Can only invest monthly. |
| Risk | Since SIPs may include investments in equity, they are more risky and subject to changes in the market. The particular mutual fund that an investor chooses to invest in will determine this risk. | No-risk or low-risk. RDs have no risk or low risk, as they are not vulnerable to market fluctuations. |
| Financial goals | Long-term financial goals. May be suitable for investors seeking more returns than expected. Suitable for retirement savings. | May be iIdeal for building emergency funds or achieving short-term financial objectives while anticipating a certain level of return. |
| Returns | Potential for significant returns in favorable market conditions. | Stable fixed returns. |
| Schemes | A plethora of schemes are available to cater to the diverse goals of investors, ensuring there’s something for everyone.
You have the flexibility to select from a wide array of mutual funds, each tailored to meet specific investment objectives. |
One scheme. No investment options available. |
- While evaluating investment options, investors may compare between the benefits of SIP vs RDs.
- Systematic Investment Plan (SIP) and Recurring Deposit (RD) are two notable investment choices that appeal to diverse investor profiles. They each have unique features such schemes, lock-in periods, and returns.
- The key difference between SIP and RD lies in their risk-level and underlying securities.
- SIPs may be suitable for investors to gradually accumulate money over time, making it appealing to those with a longer time horizon and a greater tolerance for risk.
- On the other hand, RDs may be suitable for those who want to protect their cash and receive a fixed interest rate on their savings, which is in line with their short-term financial objectives.
- While RD offers a fixed return without such exposure, SIP is prone to market fluctuations because it entails exposure to equities.
- Long-term gains from SIP could be possible, while RD provides certainty – and accommodates varying risk appetites and investment horizons.
