RD vs SIP: A Comparative Analysis

8 min read • Published 23 October 2022
Written by Chandhana Padma
RD vs SIP: A Comparative Study

Investing a small amount every month is a popular choice for retail investors as it helps you save regularly even if you do not have a large lump sum amount to invest. A Recurring Deposit (RD) and a Systematic Investment Plan (SIP) are two such investment vehicles that allow you to do just that.

In this article, we will learn about these two popular investment choices for retail investors and analyse the key differences and similarities between them. As an informed investor, you must invest your hard-earned money only in the investment instrument that best suits your present financial situation and your risk appetite based on your future needs.

What is an SIP (Systematic Investment Plan)?

There are two ways you can invest in a mutual fund. The first option is to invest a lumpsum amount that you already have. But the prerequisite here is that you must have considerable corpus for lumpsum investment. Every investor might not have that, and for some, the very aim of investing is to create a large corpus in the future. For them, the second option, SIPs, is helpful.

A Systematic Investment Plan or SIP, as the name suggests, is a systematic way of investing in mutual funds, wherein, instead of investing a large lump sum at one go, you invest a small amount every month. You can start your SIP by investing an amount as small as Rs. 500 on a monthly basis. SIP investment is a great way of building a retirement corpus. If you keep investing small amounts regularly, the magic of compounding allows your money to grow exponentially over a long period of time (say, 20 – 30 years).

Features of SIP

As per the data released by the Association of Mutual Funds in India (AMFI), the total contribution to mutual funds through SIPs in the financial year 2021-22 was Rs. 1,24,566 crores, compared to Rs. 43,921 crores just five years ago, in 2016-17. This underlines the popularity that SIPs have gained in the country in the last few years. Let us explore some of the features that make SIPs a sought-after investment choice for retail investors:

  • Since SIPs give you the option to enable auto payments, they instil discipline in your investment efforts. Even if you forget to contribute to your mutual fund in a month, the auto-pay feature ensures that your instalments are on time.
  • SIP is synonymous with convenience and flexibility in many ways. To begin with, you can start investing with smaller amounts (as low as Rs. 500) that fit your budget. You have the option to change or even stop your contributions any time you want.
  • Arguably, the most significant advantage of SIPs is the power of compounding. In investment terms, compounding means that the returns you get from your investment get reinvested so that the compounded corpus earns returns thereafter.
  • SIPs are considered beginner friendly for many reasons. For instance, since you are only contributing smaller amounts, the financial impact of the possible mistakes that beginners make in choosing a fund is minimal. Also, you do not have to worry about timing the market, as SIP investments work on the principle of averaging out. Over a long period of time, lower returns (or even negative returns) in a bear market are averaged out with much higher returns earned in a bull run.

Also Read: AMFI – Definition, Role, Objective & Importance

What is an RD (Recurring Deposit)?

A Fixed Deposit in a bank often gives you more returns than keeping your money in a Savings Account. But at the same time, not everyone has a corpus ready to invest in an FD. A Recurring Deposit (RD) is an option that banks offer to solve this problem. An RD, just like SIPs, allows you to invest small amounts every month. The interest rate on RDs is very much similar to what you normally get on an FD.

Since Recurring Deposits are not market-linked, they are one of the safest forms of investment. Moreover, since they offer fixed returns, it also makes investment planning easier. Just like SIPs, investing in RDs comes with its own benefits. Here are some of the key features of RDs:

  • Although the interest rate on RDs varies depending on the bank, it is usually between 5% and 8% per annum. Most banks credit the interest amount on a quarterly basis.
  • The tenure of investment for RDs varies from 6 months to 10 years, and like in FDs, premature withdrawal may attract penal charges.
  • Similar to SIPs, RDs are also helpful in instilling financial discipline in the investor.

RD vs SIP – The Key Differences

Investment OptionSIP is not an investment instrument, but rather an investment plan for investing in mutual funds.RDs are an investment option that banks offer.
Market-linkageSIPs invest in mutual funds, which could be market-linked.RDs are not market-linked.
Risk and ReturnsSince mutual funds can be market-linked, SIPs can give you higher returns, but there is a higher risk as well.Returns from RD are fixed by the bank. RD interest rates are similar to that of FDs.
LiquidityThe liquidity of SIPs depends on the fund chosen. Generally, SIPs are more flexible in terms of liquidity.RDs have a lock-in period till maturity. Premature withdrawal is possible but may attract a penalty.

RD vs SIP – The Similarities

RDs and SIPs have their share of similarities too. Here are some of the similarities between RDs and SIPs:

  • Both SIPs and RDs allow you to start investing with small initial amounts. You do not need a corpus ready to start investing in RDs and SIP. All you need to do is budget your monthly expenses properly so that you can save a certain amount for investment.
  • Both SIPs and RDs are long-term investment options. Both can be beneficial if you want to build a significant corpus over a long period of time.
  • They both are an option to diversify if you are a stock market investor. Investing in these (RDs in particular) could ensure that a part of your portfolio is comparatively safer during market volatility.
  • Both are highly flexible investment options. You can increase/decrease the monthly payment anytime you want. You can also set up autopay to ensure payments are made on time, even if you forget. Cancelling autopay is also easy. You even get the liberty to skip or stop investing as well.
  • SIPs and RDs suit a variety of investors. If you are a beginner without much investing experience, these could be a safe place to start. SIP or Recurring Deposit can also be a great investment option for building a retirement fund.

Also Read: Bear Market: Meaning, Phases, Signs & Causes

SIP or RD: Which One to Choose?

The choice between SIPs and RDs boils down to your personal preferences, investment goals, and risk appetite. If you like to have a planned investment tenure, then RDs may be better for you as they offer fixed returns. But if you can stomach some volatility, mutual fund investment through an SIP might be a better idea as they could fetch you higher returns. You should make a decision after thoroughly analysing the two investment options. You can also consult a financial planner if you need help deciding. Happy investing!

Frequently Asked Questions

What is the taxation on RD?

Your investments in RD will be added to your net taxable income and taxed as per your income bracket. For instance, if your income is Rs.10 lakhs per annum and your returns from RD in a financial year are Rs. 2 lakhs, your total taxable income becomes Rs. 12 lakhs.
Investment in RDs does not offer any tax benefit. Moreover, if the annual return earned on an RD is more than Rs. 10,000, the bank will deduct a TDS of 10% from the interest amount.

What is the taxation on SIP?

Taxation of SIP investments depends on the fund you have chosen to invest in. If you have chosen to invest in an equity fund (a fund with more equity presence in its portfolio), you will be taxed at a flat 10% for your returns over Rs.1 lakh as Long-Term Capital Gains. Profit up to Rs.1 lakh from an equity fund is tax-free. For debt funds, the tax on Long-Term Capital Gains is a flat 20%.
The taxation of Short-Term Capital Gains on mutual funds is different but is usually not applicable as SIP investments are long-term.

What is the minimum investment required for SIP?

The minimum investment allowed in an SIP differs for different funds. But in general, the minimum monthly investment allowed is Rs. 500.

What is the minimum investment required for RD?

RDs are more flexible when it comes to minimum amount requirements. You can start an RD with an amount as small as Rs.10. But this could be different for different banks.

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Chandhana Padma

Investment Associate
Chandhana is a budding investment professional with growing expertise in the capital markets. She has completed her Bachelors in Business Administration with a specialisation in Finance from Christ (deemed to be) University,Bangalore. She is also a CFA L2 candidate. She is currently working as an Investment Associate at Wint Wealth.

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