SIP vs RD Investment Tips: When it comes to investment, the first thing that comes to mind is Systematic Investment Plan, which is known as SIP. Similarly, Recurring Deposit i.e. RD is also mentioned, which is considered a popular investment option. SIP is known for easy investment in mutual funds. Whereas, RD is known as a savings scheme in which a fixed amount has to be deposited every month for a fixed period. Where is it more sensible to invest in SIP or RD? Let’s know about it.

Benefits of SIP

Systematic Investment Plan is a very easy way to invest in mutual funds. The best thing about it is that you can start with very little. For example, you can start investing in mutual funds with just Rs 500 through SIP. You can choose the option of investing monthly or quarterly. SIP develops the habit of regular investment and also gives the benefit of compound interest. Most people prefer monthly SIP. You can also increase the amount of SIP as per your convenience. Tax deduction is also available on SIP in ELSS mutual funds under section 80c.

Limitations of SIP

SIP has some limitations too, which is very important to keep in mind. SIPs are subject to market fluctuations and returns are not guaranteed. The returns received here depend on the market performance and the type of fund. The real benefit of SIP is available only in the long term. If you are looking for benefits in the short term, then you may not get that much return.

Benefits of RD

Talking about recurring deposit, it is a type of saving scheme where you deposit a fixed amount in your account every month for a fixed period. The amount you deposit earns interest at a fixed rate and on maturity you get the principal along with the interest earned. RD is a good investment option for such investors who want guaranteed returns with low risk.

The biggest advantage of RD is that it guarantees returns. There is no need for much paperwork to open a recurring deposit account. It can be easily started in any bank or financial institution. The interest rate of RD is pre-determined, so you know how much return you will get on the investment in the end. Therefore, you can plan for the future in advance.

What are the disadvantages of recurring deposits?

However, it also has some drawbacks. The returns on this are low compared to many investment products available in the market these days. Apart from this, the interest earned on RD is taxable based on the tax slab of the investor, which automatically reduces the total return. If you withdraw money from RD before time, then a penalty is charged. Interest is usually paid on maturity or quarterly basis.

Who will give higher return on investment?

Both SIP and RD have their own advantages and disadvantages. For example, there is a possibility of good returns on SIP in mutual funds. In the last few years, the long term returns have been between 12% and 22%. Whereas the returns on RD are much less than this. Usually, a return of 5% to 9% is obtained on recurring deposits. However, senior citizens can get slightly higher returns, but not as much as mutual funds.

Even though the returns in RD may be low, there is a guarantee of getting returns. This is not the case with SIP, because returns are affected by market volatility. Most mutual funds invest money in the stock market. Some time back when the stock market was continuously diving, the returns of mutual funds were also badly affected. Therefore, if you are ready to take risk and can invest for a long time, then SIP is the best in mutual funds. On the other hand, if you do not want to take risk in the desire of big returns, then RD is a good option.

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