When it comes to building wealth and securing your financial future, choosing the right investment method is crucial. Two popular investment options in India are Systematic Investment Plans (SIPs) and Recurring Deposits (RDs). An SIP offers a disciplined way to invest in mutual funds and earn market-linked returns. RDs are fixed-income investments where you deposit a predetermined sum monthly for a fixed tenure.
Curious about whether SIPs or RDs align better with your financial goals? Let’s explore the benefits of each to help you make a well-informed decision.
Benefits of SIP investments
NAV/unit price variation
An SIP allows you to invest a fixed amount at regular intervals (e.g., monthly), regardless of market conditions. When the Net Asset Value (NAV) or unit price of a mutual fund is low, your fixed contribution buys more units. When the NAV is high, fewer units are purchased. This strategy, known as rupee-cost averaging, helps balance out market fluctuations, reduces the average cost per unit, and enhances long-term returns.
Tax benefits
Tax-saving mutual funds, such as Equity Linked Savings Schemes (ELSS), offer tax benefits under Section 80C of the Income Tax Act, 1961. You can claim deductions of up to ₹1.5 lakh per financial year and reduce taxable income significantly.
ELSS funds also have a lock-in period of three years, which is shorter than many other tax-saving instruments. This way, you enjoy dual benefits, i.e., high returns through equity exposure and substantial tax savings.
Suitable for all risk appetites
Mutual fund investments cater to different risk appetites. For example, if you have a high-risk tolerance, setting up an SIP in equity funds can be an ideal option. Debt funds might appeal to risk-averse investors who prioritise safety and stability. Hybrid funds combine equity and debt to strike a balance for moderate-risk investors. SIPs also include gold funds, which provide a hedge against market volatility and inflation.
Plan better with tools
You can use tools like an SIP calculator to plan your SIPs wisely. It shows the future value of your SIPs with three basic inputs, i.e., your regular investment amount, interest rate, and tenure. Based on the results, you can adjust your investment amount or duration to achieve your desired financial goals more effectively.
Benefits of RD
Guaranteed returns
RDs are a risk-free investment option as they are not market-linked. The interest rate is pre-determined when you open the RD and remains the same throughout the tenure.
Insured by DICGC
RDs offered by banks are covered under the Deposit Insurance and Credit Guarantee Corporation (DICGC). As per DICGC regulations, each depositor is insured for up to ₹5 lakh, including both the principal and interest across all deposits, including RDs.
Flexible tenure options
RDs allow you to choose tenures ranging from six months to 10 years. This flexibility means you can invest for a duration that fits your specific financial goals, such as saving for a short-term expense or a long-term objective.
Loan facility
Many banks offer loans of up to 90%-95% of the RD balance. This feature provides liquidity without the need to prematurely close the RD. The deposit continues to earn interest, while loan interest rates are typically lower than those of unsecured loans.
Should you invest in SIPs or RDs?
If you are risk-averse and prefer guaranteed returns, an RD is a safe and dependable option. It works best when you prioritise security over high growth. You can choose SIPs if you aim for long-term wealth creation and can handle moderate market risks. It’s ideal for long-term goals like retirement planning, buying a home, or funding your child’s education, which require building a substantial corpus.
You can also include both SIPs and RDs in your financial strategy. SIP investments help you grow wealth through market-linked returns, while RDs secure your savings with predictable outcomes. This way, you can achieve both financial stability and growth.
Also Read: How to Open an SIP Account Online and Start Investing?
