SIP vs. RD: Which is the Better Investment Option?

Ever wondered where to park your hard-earned money? You want it to grow. However, at the same time, you also seek safety. This is where two familiar yet not-so-similar options come to the fore - systematic investment plan (SIP) and recurring deposit (RD). If you’re confused about whether to opt for SIP or RD or which is a better option, read on.

RD or SIP: Which is Better?

Before declaring a winner between SIP and RD, let’s understand what they actually are. SIP is a mode of investment through which you contribute a regular and fixed amount of money in financial instruments like mutual funds and stocks. SIPs are like that friend who always tell you to think long-term.

On the other hand, RDs are your safety-first buddy. You deposit a fixed amount monthly in a bank, and at the end of the term, you get your money back with interest. No surprises, no risks.

SIP vs RD: Which is Better?

To arrive at the eventual winner, let’s divide the battle into a game of boxing with several rounds:

• Round 1: Returns: Which Makes Your Money Grow Faster?

Let’s be honest. We all invest because we want higher returns. RD returns vary across banks, while mutual fund SIP returns have been historically high. That said, they depend on how the market performs. Some years might be great, some not so much, but if you stay invested long enough, SIPs usually outperform RDs. In round 1, SIPs emerge as the eventual winners.

• Round 2: Capital Safety: How Safe is Your Money?

RDs are relatively safe. You get a fixed return and there are fewer chances of losing your money due to market vagaries. On the other hand, SIPs in mutual funds and stocks are subject to market risks where fluctuations can eat your gains within a short span. When it comes to capital safety in round 2, RDs score over SIPs.

• Round 3: Investment Ease: Who’s More Easy Going?

RDs are pretty easy to open. You go to your bank, fill up the form, and you are done. What’s more! If you have net banking, you can do so from the comfort of your home or office.

On the other hand, SIPs in mutual funds or stocks are equally easy. You can do it offline or online in just a few taps. Also, with RDs and SIPs, you can take out the money anytime needed. So, it’s a tie between RDs and SIPs in this round.

• Round 4: Tax Benefits: What Saves You More Money?

A TDS of 10% is deducted if total interest exceeds ₹10,000 from an RD in a financial year. On the other hand, in the case of SIPs from mutual funds and stocks, taxes are levied based on the holding period at the time of redemption.

For listed equity shares and mutual funds, if the holding period is more than 12 months, long-term capital gains tax is charged at 12.5% for gains above ₹1.25 lakhs in a financial year without indexation. Also, SIPs in equity-linked savings schemes (ELSS) are subject to tax benefits under Section 80C of the Income Tax Act.

When it comes to tax efficiency, SIPs hold an advantage over RDs.

The choice between SIP and RD depends on your needs and risk tolerance. If you want safety and fixed returns, you can opt for RDs. On the other hand, if you can handle market vagaries and can take some amount of risk, you can choose SIPs.

In Conclusion

Investing in RDs and SIPs gives you the best of both worlds. You can keep some money in RDs for stability and invest via SIPs for growth. This way, you get the balance of safety and wealth creation at the same time.