SIP or RD – which one suits you better?


Savings help you have the funds when you need them. Setting aside a part of the income as savings is a must for long term financial freedom. After that, as a second step, you must invest the savings in the investment options of choice. Traditional saving options like mandatory retirement savings and pensions are usually not enough to sustain during the non-active years of life. Therefore, you must save beyond the minimum. The most popular investment options are mutual funds through systematic investment plan (SIP) route, fixed and recurring deposits (FD and RDs), gold, property, etc. Each of them is important, and investors must understand each. However, we will focus on SIP and RD, which seem to be similar and explore their suitability for investors. In other words, we will address the question of SIP or RD – which one suits you better?

Since the focus is specifically on SIP and RD, we will explore the nuances of both these two methods. For example, a fixed amount gets invested in SIPs and RDs, which is similar in the case of both. But, quite frankly, that is all that is in common amongst the two. Similarly, SIP does not offer fixed returns, whereas, in the case of RDs, investors know the returns from the beginning itself.

In other words, both these options are quite different even though the modus operandi appears to be the same.

How do both work?

  • A regular investment of an equal amount and pre-defined intervals
  • The date to invest is fixed
  • Investment happens in the same fund or deposit scheme, time and again on decided dates
  • Regular investing instils financial discipline

Let us first comprehend what each of these means before evaluating their suitability to an investor type. After that, understanding the two products’ pros and cons will be more explicit, and investors will appreciate the same.

Systematic Investment Plan (SIPs)

Systematic Investment Plan (SIPs) is a facility to invest in mutual funds in a disciplined manner, gradually, and over time. In other words, in a SIP, a fixed amount gets invested at set intervals. SIPs work on the principle of cost averaging over a long period and gains from compounding. As a result of consistent investments on specified dates, investors develop a habit and discipline to save money and eventually create a significant corpus.

Above all, investors can begin with a small amount, and the investment does not require opening a Demat account. The purchase and sale transactions are pretty straightforward and easy to conduct. Both online and offline investment options are available. Above all, diversification through mutual funds is a given as the amount splits across several shares and possibly across asset classes.

Recurring Deposits (RDs)

A recurring deposit (RD) is a financial instrument offered by banking institutions. Investors make regular deposits for a specified period and earn returns (aka interest) from the amount invested.

The rate of return often varies with the duration chosen for recurring deposits. However, for any recurring deposit, the interest rate is known from the inception itself. After that, the interest rate gets locked and remains the same for the duration of the investment. In addition, since these deposits are with banks, they are considered safe and relatively risk-free. However, it is imperative to note that the credibility of the financial institution does play a factor.

RDs are different from fixed deposits (FDs); in the latter, the investment is one time. In RDs, the amount gets invested at regular intervals. However, both are savings-cum-investment instruments.

SIP or RD – which one suits you better?

To answer this question, we will compare both these similar-looking options across various parameters. And, in the end, the choice should be obvious based on what type of investor you are.

Parameter Systematic Investment Plan (SIP) Recurring Deposit (RD)
Investment system
Investment happens in mutual funds The investment happens in a deposit scheme, usually offered by financial institutions (banks)
Choice of investment
SIPs are pretty friendly here. Investors can choose amongst the various mutual funds available There are flexible RDs offered by banks that provide some flexibility
Usually, there is no end date for SIP investments. In other words, this investment can technically be perennial RDs are for a specific period and have a maturity date. Usually, the tenure ranges between 3/6 months to about ten years
Mode of return
SIPs derive their returns from the market. For instance, equity-oriented SIPs will earn based on movement in the price of stocks in which the mutual fund has invested Recurring deposits earn a fixed interest rate
Return assurance
Mutual fund investments are market-linked, and there is no guarantee of returns Returns are assured and based on the offered interest rate. In other words, investors know the return at the time of making the investment
Target investor category
Aggressive investors would like SIPs. However, conservative ones will also be able to find opportunities by choosing debt funds, etc. Risk-averse investors can invest in RDs.
Frequency of investment
Most often, investments in SIPs happen monthly. However, options to invest on a weekly or daily basis are also available RDs investments are usually monthly
Risk factor
The mutual fund returns are subject to market returns. In other words, they are risky Recurring deposits are safe and considered a risk-free investment
Returns are taxable, except in the case of investment in Equity-Linked Savings Scheme (ELSS) Interest income is taxable
Investment is relatively liquid and can be converted into cash quickly at the market value RDs are liquid; however, investors may incur additional charges for pre-closure
Financial planning (Goals of investment)
SIPs are common investment avenues to build a corpus over a long investment time frame. In other words, SIPs are not preferable for short term investment RDs are means to invest money for a short term

The bottom line

A recurring deposit (RD) is a safe investment option and comes with a guaranteed fixed rate of return. However, a systematic investment plan (SIP) is a way to participate in capital markets through investment in mutual funds.

Both the investment options are good and immensely popular. Usually, RDs address needs to invest in the short term. SIPs, on the other hand, are a mechanism to meet investment goals and are used to build a corpus. In other words, SIPs are for the long term.

In conclusion, investments aim to grow and generate returns keeping in mind the investor’s risk appetite. Further, we have elucidated all the significant points of similarity and difference between SIPs and RDs. Therefore, choose wisely, but always remain an investor. Generally, risk appetite and investment goals supersede any other criteria to select the proper investment vehicle.

Happy investing!

About the author

The author is a senior finance professional with over fifteen years of work experience in corporate finance. He has an affinity for matters relating to personal finance and investment management. Through his writing, the author wants to share his knowledge and understanding of the subject.

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The author has used his knowledge, experience, and understanding of the subject and has exercised extreme caution to avoid possible mistakes. However, the author does not take any responsibility for any error that exists.

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