Systematic Investment Plans (SIPs) and Recurring Deposits (RDs) are both popular ways to invest small amounts regularly. While both require a fixed monthly contribution, they differ in returns, risk, and flexibility.
SIP: Market-Linked Growth
In a SIP, a fixed sum is invested in mutual funds at regular intervals. The amount is auto-debited from the bank account and converted into units at the prevailing Net Asset Value (NAV). Over time, compounding and rupee cost averaging can help build wealth.
Example for Rs 4,500 per month over five years:
- Invested Amount: Rs 2,70,000
- Estimated Returns: Rs 94,966
- Total Value: Rs 3,64,966
RD: Fixed and Assured Returns
An RD allows investors to deposit a fixed sum every month into a bank or post office account for a set period, earning a fixed interest rate. It is a low-risk option with guaranteed returns.
Example for Rs 4,500 per month over five years at 6.7% interest:
- Invested Amount: Rs 2,70,000
- Estimated Returns: Rs 51,147
- Total Value: Rs 3,21,147
Comparison
- Risk: SIPs are market-linked, RDs are risk-free.
- Returns: SIPs may offer higher returns, RDs provide stable but lower gains.
- Liquidity: SIPs allow flexible withdrawals, RDs have penalties for early closure.
- Best For: SIPs suit long-term investors seeking growth, RDs suit those preferring safety.
- Over five years, SIPs can nearly double the returns of RDs for the same monthly investment. The right choice depends on an investor’s financial goals and risk tolerance.