SIP vs RD: Which one you could opt for and why
On RD schemes, an investor can receive between 5.8 percent and 7 percent over the course of five years. While, depending on the type of funds, SIP in mutual funds can yield an average annual return of 12 percent
Investment in various assets is a smart strategy for generating a stable income during periods of high inflation and market volatility. Recurring Deposits (RD) are a popular choice among investors with minimal risk appetites, while Systematic Investment Plans (SIP) in mutual funds are recommended for those who are less risk averse yet are experienced with the stock markets. Recurring deposits are a type of debt instrument that provides investors with capital guarantees on their invested funds. SIPs are a similar investment method that also introduces investors to mutual funds. However, rather than investing all at once, investors can make fixed investments at regular intervals.
Differences between Recurring Deposits (RD) and Systematic Investment Plans (SIP):
- A specialized deposit plan that offers you guaranteed returns is available with RD programs. Investors occasionally have the opportunity to choose flexible recurring deposit options for convenience. Depending on the risk appetite of the investor, SIPs in mutual funds may consist of debt or equity types of funds.
- Risks are not common in RD schemes, but returns on SIPs can be unpredictable. For instance, if a person chooses equities funds, his or her financial situation could change depending on the stock market.
- According to AMFI data, SIP often generates strong returns when kept for a long time.
- For a recurring deposit plan, the interest rate is set. Investors are therefore aware of the amount they will get at the end of their term. Returns from SIPs, on the other hand, are connected with the market.
- Mutual Fund scheme earns more money when markets climb, and vice versa.
- Although recurring deposit plans are liquid, depending on the banks, early withdrawal or closure may result in penalties. For SIPs, the plans may be terminated at any moment, and the funds may be withdrawn without suffering any penalties. Only SIPs in equity-linked saving schemes (ELSPs) have a three-year lock-in period.
- On RD schemes, an investor can receive between 5.8 percent and 7 percent over the course of five years. On the other hand, depending on the type of funds, SIP in mutual funds can yield an average annual return of 12 percent. If the market is doing well, it can jump to 15–18 percent. Since investors benefit from compound interest, long-term plans may offer greater rewards.
Similarities between Recurring Deposits (RD) and Systematic Investment Plans (SIP):
- Both investment options offer routine (monthly or quarterly) investments.
- The schemes enable investors to make small investments over time (5 years in RD).
- They also provide a lot of flexibility.
- Both options can be closed anytime and the invested money can be withdrawn. However, there can be additional fees associated with early withdrawal.
- If investments are not made on a consistent basis, the schemes may be terminated and investors may need to restart them.
Rate of Return:
If one invests Rs 5,000 per month for five years in a post office RD scheme at an interest rate of 7 percent, the total maturity amount will be Rs 3,59,663.95, while for the same amount of investment in SIP (as per 12 percent interest rate), the maturity sum will be Rs 4,12,432.
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