RD vs Mutual Funds: Which One is Better for You?

8 min read • Published 11 November 2022
Written by Anuj Agarwal
RD vs Mutual Funds

Saving for the future is the main aim of investment. Different investors could have different goals, but all of them would involve saving for the future in one way or another. 

There are numerous investment options depending on your goals and risk appetite. Thankfully, there are more than adequate options for each category of investors.

Recurring deposits and mutual funds are two popular options here. Banks offer recurring deposits as a savings scheme to create a corpus by saving a small amount each month. It is one of the more conservative investment options.

On the other hand, a mutual fund is a scheme that makes investing in different securities easier. It has a prebuilt portfolio for you to choose from, based on your preferences. The investment’s return potential and risk profile depend on the fund’s portfolio. 

But which investment option would be more beneficial when considering recurring deposits vs. mutual funds?

Let us compare RD vs. mutual funds to try and answer this. 

What is RD?

A recurring deposit, also known as RD, is an investment scheme offered by banks in India. It is similar to savings and fixed deposits, but the way of investment is different. While FDs allow you to invest a lump sum and earn interest from it, RD is a tool you can use to invest regularly, say, monthly, and earn substantial returns. Thus, RDs allow you to create a sizable corpus by investing small amounts every month. 

RDs are much more flexible than FDs. Modern banks offer you the flexibility to choose the monthly investment amount but with an interest rate similar to that of FD. 

RDs are flexible in terms of term selection too. Most banks in India offer RDs in tenures of six months, one year, and similar. Some banks allow you to choose a tenure according to your needs. 

RDs also have a fixed interest rate, which remains unchanged during the tenure of the investment. This feature makes RD a safe investment option. Market volatility does not impact the return potential of RDs in any way. At the same time, RDs do not usually have enough return potential compared to market-linked options. 

What is a Mutual Fund?

A mutual fund is an investment option that makes investing in different securities easier. Traditionally, you would choose the securities and invest in them manually to create a balanced portfolio. You would also need to monitor the same regularly to ensure your portfolio is performing according to the plan. However, a mutual fund makes investing easier here by skipping some of the above steps. It pools money from different investors and invests in securities such as equities, bonds, government securities, gold, etc., according to the fund’s theme.

For instance, an aggressive investment portfolio would include options like equities. Companies that set up mutual funds are known as asset management companies. They are also called fund houses.

These fund houses appoint an experienced fund manager to manage each mutual fund portfolio. The primary role of the fund manager is to create a portfolio according to the fund’s theme and then monitor and manage the same according to market conditions. There are two types of management styles.

Active management ensures the fund manager actively makes changes to the portfolio based on market conditions. Passively managed funds often follow an index as it is when it comes to its portfolio. That means the portfolio of a passively managed fund will be the same as the fund’s composition. Here, the fund doesn’t try to outperform the index but instead follows it.

The fund manager is also responsible for pooling money from different investors. The funds thus collected are then invested in various securities according to the fund’s theme.  

One major difference between mutual funds and other investment options is the cost of investing in mutual funds. Investors bear the costs of management and payment to the fund manager. This charge is known as the expense ratio, which is often a percentage of your invested amount. You should ensure that you invest in a fund with a lower expense ratio to increase your returns from the same. 

RD vs mutual funds – The differences 

Mutual funds and RDs are different in many ways. Let us understand them and examine which is more beneficial while comparing mutual funds and RD.

ParameterRDsMutual funds
ReturnsThe returns from RDs are fixed. You will get interest according to the preset interest rate, which may not change during the tenure of the investment.The return potential of the mutual fund is dependent on its portfolio. An equity-focused fund may give you better returns but with higher risk, while a debt-focused fund may have a lower risk but offer lower returns. Higher-risk mutual funds have substantially higher return potential compared to RDs. 
Style of investmentYou can invest a set amount of money on a monthly basis to create a corpus.You have the option to invest a lump sum or a small amount every month. The latter option is called systematic investment plan (SIP). SIPs are more flexible than RDs. 
Market-linkedRDs are not market-linked. They have fixed interest rates. Mutual funds are mostly market-linked. Even debt funds may have market-linked securities.
Maturity periodRDs may have different maturity periods according to the scheme you have chosen.Mutual funds need not have a fixed maturity or lock-in period, making them more liquid. You may divest from such mutual funds whenever you want.
Risk associatedRD comes with low-risk. There is no market linkage and returns solely depend on the interest rate.The risk associated with a mutual fund may vary depending on the overall market condition and also vary basis the investment theme of the fund . Mutual funds tend to be riskier than  RDs in general.

Mutual funds vs RD – The similarities

Mutual funds and RDs have some similarities as well. Both options allow you to invest a small amount of money every month to slowly build a corpus. But in the case of mutual funds, there is an option to invest a lump sum as well.

RDs are a more conservative investment option. Similar to FDs, they carry low risk. You can choose to invest conservatively in mutual funds as well by investing in debt mutual funds investing in government securities where the risk is negligible, though the return will also be lower.

Both investment options are designed to make investments easier. In RDs, you might not need to monitor the investments regularly, while mutual funds offer you the flexibility to monitor the funds on a regular basis. But this may vary according to the fund you have chosen.

Final Thoughts 

RDs and mutual funds are two investment options with many differences and a few similarities. As mentioned above, the current investment scenario gives numerous options to every investor, RD and mutual funds being two of the most popular. While RD is less flexible but works well for a conservative investor, mutual funds are far more flexible and give multiple alternatives according to your investment horizon and risk appetite. It is essential to research thoroughly and find an option that works well for you according to your goals and investment risk appetite. 


Which one is better, RD or mutual fund SIP?

Both RDs and mutual fund SIPs are popular options with numerous benefits. RDs offer a fixed interest rate and have low risk. In contrast, mutual fund SIPs let you invest in both conservative and aggressive options. At the same time, SIP is more flexible than RD. You may consider the two factors and pick one that closely matches your preferences.

Is RD a good investment?

RDs can be a promising investment avenue for investors looking for lower-risk options and those who want to invest money every month to create a corpus. But if you are looking for more aggressive options, you may consider SIP in mutual funds.

Can I stop SIP after one month?

SIPs are flexible. You can change the investment amount or stop investing at any time, even if you have set autopay.

How can I check my RD interest rate?

Your RD interest rate will be predetermined, and the bank will communicate the same when investing. It is best to contact your bank with any doubts.

Is SIP tax-free?

Not in general. Some investment options like ELSS may qualify for tax deductions, though.

What is the best alternative to RD?

A SIP is flexible and is often considered an excellent alternative to RD.

Which is better, FD or RD or SIP?

RD and SIP may prove to be better options if you aim to create a corpus with monthly instalments. FD may work better if you are trying to appreciate your capital and have bulk amount to invest upfront.

Was this helpful?

Anuj Agarwal

Investment Principal
Anuj is an investment professional with a demonstrated history of working in Debt Capital Markets. He has completed his B.Com (Hons) in St. Xavier’s College, Kolkata and holds PGDM (Finance) degree from GIM. He is currently working as Investments Principal at Wint Wealth. He has been working in the debt capital market space for the past 4+ years and is also an NISM certified mutual fund expert.

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