Automating your savings and investing is the best and easiest way to fulfill your financial goals and create wealth. Putting investment in auto-pilot mode can help individuals to save and invest money before they can spend. Systematic Investment Plan (SIP) and Recurring Deposit (RD) are two of the popular ways to automate your investment. But SIP and RD are not the same things and it varies from each other a lot.
Recurring deposit is a term deposit that is offered by all the banks. Through RDs, you can make regular deposits to your recurring account. The amount is auto-debited from the savings account to the RD. You can select a certain amount of money that you want to invest every month and for a certain time period.
SIP is a way to invest in mutual funds. In SIPs, you can invest a certain amount of money on a monthly or a quarterly basis in the fund of your choice. Once you set up a SIP in a fund, the amount of money will be automatically debited on the given date from your savings account.
Before investing in either RD or SIP, it is better to check the differences so that you can make the right decision. Here are some of the parameters where it differs:
The asset class is the underlying asset of the investment option. Broadly, there are three types of assets: debt, equity, and commodities. The investment objectives of these assets also vary. While the investment objective of the debt instrument is to protect capital, equity investments are meant to give higher returns and grow your capital.
A recurring deposit falls in the debt category. On the other hand, SIP is an investment tool that is available for both equity and debt funds. Hence, it can invest in both equity and debt funds.
Recurring deposits carry lower risks as depositors earn a fixed rate of returns. It is not dependent on market returns. Also, the rate of return varies across different tenures. The rate of return will remain the same until the RD matures. However, in SIPs, the returns are subject to market risks and are dependent on the type of asset class. Hence, the market rate of SIPs can’t be predicted and is based on the fund scheme that is chosen by the investor.
Recurring deposits have a certain maturity date while there are no maturity dates for open-ended funds. You can attract a penalty if you withdraw or close the account before the maturity date. In the case of SIPs, you can pause SIP or stop the SIP without paying any penalties. However, if you want to redeem before a certain time, then you may have to pay an exit load.
In the long run, systematic investments in mutual funds are tax-efficient than RDs. In the case of equity mutual funds, the capital gains of 10% are applicable if the capital gains are higher than Rs. 1 lakh in one year. Also, equity-linked savings schemes, a category of equity funds provides tax exemption under Section 80C of the Income Tax. Moreover, investors get the benefit of indexation if they stay put in debt funds for more than three years. In simple terms, indexation considers inflation in that particular year and the returns are taxed over and above the inflation rate.
The financial goals give meaning to our investments. RD and SIP can be both used to fulfill financial goals. However, RDs are better suited to help us achieve short term goals and not long term goals. It is because RDs provide a fixed rate of return and with little time on your side, it is better to stick to an investment option that protects your capital. SIPs, especially in equity mutual funds are better equipped to fulfill long term financial goals because it has been seen that equity investments give higher returns and help build a greater corpus in the long run.
Asset class, risks and returns, liquidity, tax efficiency, and investment goals are the five key differences between SIP and recurring deposits. To summarise, if your financial goal is a short term goal, then you can park your money in RD, or else, you can set up a SIP in a diversified equity fund.Tags: SIp, RD
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