SIP or Recurring Deposit? Difference between Recurring Deposit and SIP

Published On: 14-Oct-2020

Systematic Investment Plan (SIP) is an investment option for investors to invest in mutual funds periodically. Once a SIP is registered, the investment amount is automatically deducted from the bank account on the specified date and invested in mutual funds. This allows investors to make consistent investments towards their financial goals. 

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On the other hand, a Recurring Deposit (RD) is one of the traditional investment options allowing the investors to save a fixed amount every month. An RD comes with a lock-in period, which is determined by the investor at the time of opening the account. The term may range from six months to five years, based on the investor's needs and goals. 

While both RD and SIP are saving products helping one to accumulate savings over a period, the table below summarises the significant differences between RD and SIP.

Differences between Recurring Deposit and SIP

Here is the comparison of recurring deposit vs. SIP:

Particulars

Recurring Deposit 

SIP

Returns

IT provides guaranteed returns at a fixed rate of interest.

It provides market-linked returns based on the performance of the underlying portfolio.

Investment Risk

There is no downside risk involved in RDs, as the principal is protected. 

The NAV of mutual funds fluctuates as per the market movements. As such, mutual fund investments are subject to market risks.

Maturity

It carries a fixed tenor and matures automatically at the maturity date. 

While SIP may be registered for a fixed tenor, the redemption of investments is investors’ choice and may be done at a later period. 

Asset Allocation

It provides fixed returns and fulfils the need for debt investments in the portfolio.

One may start a SIP in a wide range of mutual fund schemes across asset classes, viz. debt, equity, etc. SIP provides more flexibility to the investors to manage their asset allocation. 

Flexibility of Investment

The periodicity for RD investments may be only monthly.

Investors may choose the daily, weekly, monthly, quarterly, etc. As such, SIPs are more flexible in terms of setting investment periodicity. 

Penalty on missing installment

It generally charges penalty on the missed installments, which may be fixed in amount or as a percentage of the installment. 

There is no penalty charged by the mutual funds on missing the SIP installment.

Liquidity

It may be withdrawn before the expiry of the fixed term. However, such premature withdrawal attracts a penalty in terms of reduction in the interest rate. 

Since the investments in mutual funds do not carry a fixed maturity, there is no penalty for the redemption of MF investments before the SIP period ends. While the mutual fund investments may be subject to exit load, such exit load is based on the holding period and the type of mutual fund scheme. Such an exit load is intended to disincentivize the investors to redeem at an early stage. SIPs in ELSS schemes have a lock in of 3 years from date of investment.

Taxation

The returns from RD are taxed as interest income and is subject to TDS. The returns earned from RD must be declared on an accrual basis, i.e., yearly in Income Tax Return (ITR). The interest income is added to the regular income of the investor and taxed at the regular rates.

The returns from SIP investments are taxed as Capital Gains. However, the tax is payable only once the investments have been redeemed. The tax rates on such gains vary according to the holding period and type of the mutual fund scheme. For tax purposes, mutual funds may be classified as equity-oriented funds and other funds. Further, the gains may be classified as Short-Term Capital Gains (STCG) and Long-Term Capital Gains (LTCG) based on the holding period of investments. 

Wealth Creation

Since the returns are fixed in nature, one may not expect the investments to contribute to wealth creation beyond what has been guaranteed. 

One may register a SIP in different mutual fund schemes. Depending upon the type of schemes and the risk-reward trade-offs, one may plan for long term wealth creation through SIP investments. 

 

With the above points of difference, one may make an informed decision about investing in the right investment product best suiting the financial requirements. 

Disclaimer: The chart/information shared above is for illustrative purposes only and should not be construed as advise. The above is to illustrate the concept of asset allocation. There is also a possibility of the expected event not happening or some other unforeseen event that may affect the future performance of asset class. Investors are requested to note that there are various factors domestic and global that can have impact on performance of the asset class mentioned in the article. Information given is available in public domain