RD vs. SIP: Which is a Better Investment Option

Open a DBS Bank Account Now

Key Takeaways

• A Recurring Deposit (RD) is a fixed monthly investment plan with fixed interest rates.
• A (SIP) is a method of investing in mutual funds in instalments at regular intervals.
• While RDs generate fixed returns, SIP returns may vary based on fund NAV and market fluctuations.
• RDs provide capital protection and are risk-free, whereas SIPs are subject to market risks.

Introduction

As the saying goes, “Little strokes fell great oaks.” This is true when it comes to investing. Building wealth is a marathon, not a sprint, and consistent investing is one of the most effective ways to reach your financial goals.

Suppose you're saving up for a down payment on a house. You know you won't be able to write a big cheque overnight, so you decide to set aside a fixed amount of money every month. This consistent approach, much like regular deposits into an investment, is key to achieving your long-term goals.

When it comes to choosing an investment option that allows for regular deposits, two popular choices often come to mind - Recurring Deposits and Systematic Investment Plans. But which one is better for you? In this article, let’s compare RDs and SIPs to understand how they work, and which one might better suit your investment needs.

Open a DBS Bank Account Now

Recurring Deposit vs. SIPs: Meaning & Benefits

Recurring Deposits

A Recurring Deposit is a type of deposit plan wherein you deposit a fixed sum of money every month in a term deposit for a chosen tenure. Individuals with regular monthly income, who wish to save money in a high interest-bearing deposit, usually opt for an RD. If you can't make a lump sum payment for a Fixed Deposit, RD lets you accumulate that sum gradually through instalments.

Opening a Recurring Deposit account with DBS offers a range of lucrative benefits, including instant and paperless account setup and an approximate annualized yield of 7.27% on fixed deposits. If you’re an existing customer, you can easily open a Recurring Deposit by opening the app, navigating to the 'Deposit' section, and following the on-screen instructions.

Benefits of RDs

• Disciplined Saving:

  With RDs, you save a fixed amount each month, building a habit of regular saving.

• Affordable Starting Point:

  Opening an RD requires as low as ₹100/month. This low initial investment makes RDs accessible to several individuals, regardless of their financial situation.

• Compounded Interest:

  Earned Interest on RDs grows quarterly, boosting overall returns. When the term ends, you get back your total savings plus interest.

• Safe Investment:

  RDs are known for their capital protection. Unlike market-linked investments, your principal amount is guaranteed, making them a safe option.

SIPs

A Systematic Investment Plan is a strategy for investing in Mutual Fund Schemes. Through SIP, you can invest in one or multiple Mutual Fund schemes gradually over time. You have the flexibility to select your preferred investment intervals - weekly, fortnightly, monthly, quarterly, etc. Each SIP instalment allows you to purchase fund units based on the Net Asset Value (NAV) on the investment date. This means you may receive fewer units when the NAV is high and more units when it's low.

Benefits of SIPs

• NAV/Unit Price Variation:

  When the NAV/unit price drops, investors can purchase more units for the same SIP amount, and vice versa, when it grows. This reduces the impact of market fluctuations, making SIPs ideal for achieving long-term financial goals such as funding a child's education, planning for retirement, purchasing a home, and more.

• Accessible Investment:

  Investors can start with as little as ₹500/month, making SIPs accessible to many investors.

• Compounded Growth:

  The returns earned in SIPs are reinvested, leading to rapid growth over time.

• Expert Management:

  Experienced fund managers use research to make investment decisions that maximise fund growth.

• Diversified Investment:

  SIPs allocate funds across a diversified portfolio of securities, effectively spreading risk and potentially giving higher returns than traditional FDs.

RD vs. SIP: Key Differences

1. Onboarding

   You can open an RD with any bank or through your Savings Account. You can visit your bank or create the RD online through the internet and mobile banking platforms. As for SIPs, you can select your preferred fund house or Asset Management Company (AMC) and investonline after completing the necessary KYC compliance.

2. Returns

   Another point of comparison between RD vs. SIP is the returns they generate. RDs generate fixed but lower returns based on the applicable interest rate. In contrast, SIP returns fluctuate based on market conditions and the type of mutual fund SIP chosen, potentially offering higher returns in comparison.

3. Liquidity

   RDs come with fixed lock-in periods. While you can opt for premature withdrawals, they may attract penalties. All Mutual Fund SIPs, except ELSS Equity Mutual Funds with 3-year lock-in periods, are significantly liquid. You can exit all mutual funds except ELSS funds before maturity.

4. Risk

   RD is the safest investment vehicle since banks pay you a fixed rate of interest, and your capital amount remains unaffected. On the other hand, SIPs entail several risks, including market risk, concentration risk, volatility risk, liquidity risk, etc., and may erode your capital.

5. Tenure

   RDs have a fixed maturity period ranging from 6 months to 10 years. This clarity makes RDs suitable for short to medium-term financial goals, as you know exactly when the funds will be available. On the other hand, SIPs offer indefinite tenure, allowing investors to continue their investment for as long as they wish. This flexibility enables investors to manage the duration of their investment according to their preferences.

6. Scheme

   RDs suit cautious investors looking for stable returns and capital preservation. This makes RDs a preferred choice for individuals who prioritise safety in their investments and are averse to taking risks. SIPs are versatile and suitable for cautious and aggressive investors with diverse risk appetites. The diversification offered by mutual funds allows investors to align their investments with a wide range of financial objectives.

   Here’s a table summarising the key differences between Recurring Deposits vs. SIPs:

   Criteria	RD	SIP
   Returns	Fixed and secured	Market dependent
   Liquidity	Fixed lock-in periods	Highly liquid (Except ELSS funds)
   Premature Withdrawl	May incur penalty	Exit anytime (Except ELSS funds)
   Risk	Safest investment	Various risks(market, concentration, volatility, liquidity)
   Tenure	Fixed maturity (6 months to 10 years)	Do not have a specific tenure
   Instalment Frequency	Monthly instalments	Flexible plans - daily, weekly, monthly, quarterly (typically adjustable)
   Suitable for	Cautious investors looking for stable growth	Both cautious and aggressive investors seeking growth regardless of fluctuations in the market

SIP vs. RD: Which is Better?

Let's see how RDs and SIPs can be used for different financial goals:

Scenario 1:

John, aged 30, wants to save up for a down payment on a house in three years. To do this, he starts a Recurring Deposit with a bank, committing to deposit ₹5,000 every month for 36 months.

With this plan, John knows he'll get a fixed amount back upon maturity, which includes his deposits and the interest earned.

Scenario 2:

Lisa, a 35-year-old in IT, plans to save for retirement. With 30 years until retirement, she chooses a mutual fund SIP. Starting with ₹8,000, she sets up a monthly SIP of ₹3,000.

Lisa picks an equity mutual fund for potential long-term gains, despite market risks. By retirement, her SIP investment has risen substantially through compounding and market performance.

Both John’s RD and Lisa’s SIP help them achieve their objectives. These scenarios illustrate that choosing between SIP vs. RD depends on your financial goals and how long you plan to invest (investment horizon).

The Bottom Line

Now that you know the difference between RD and SIP, you can choose your preferred investment option. If you have a low-risk appetite, you should opt for Recurring Deposits. However, if you can tolerate market risks, Systematic Investment Plans are the better option. Whatever investment you choose, make sure to consider your investment goals and risk profiles before investing.

Frequently Asked Questions

1. Can I modify the RD's deposit amount?

   No, once you start an RD, you can't alter its duration or the deposit amount.

2. Is RD worth investing in?

   RDs are a good option for low-risk investors seeking guaranteed returns and inculcating a savings habit. They are ideal for short-term goals like vacation, home repairs, and more. Make sure to consider your investment horizon and risk tolerance before choosing the best fit.

3. Is RD good for the long term?

   RDs are a good option for long-term savings if you prioritise guaranteed returns and low risk. They instill discipline with regular deposits and compound interest builds your nest egg over time. However, consider exploring investment options with higher returns for long-term goals.

Download DBS Bank app to get started with your SIP.

Open a DBS Bank Account Now

*Disclaimer: This article is for information purposes only. We recommend you get in touch with your income tax advisor or CA for expert advice..