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2 mins Read | 4 Months Ago

SIP vs RD: Deciding your ideal investment option

Debt Funds versus Fixed Deposits: A Comparative Study


Saving money consistently is a commendable financial habit that sets the stage for a secure financial future. When coupled with wise investments in suitable financial instruments, it can lead to the creation of a substantial financial cushion. Among many investment options available, Mutual Funds and Recurring Deposits consistently feature among the most preferred choices for investors seeking to make the most of their savings.

This blog will help you choose between an SIP or RD and see which is better for your financial goals. Remember that both these options boast unique advantages for various financial needs and goals. Ultimately, choosing between SIP and RD will come down to various factors such as your investment objectives, risk tolerance, liquidity preferences and expected returns.

In the following sections, we will get into both these financial instruments and discuss their features, benefits and how they align with diverse financial goals. So, let’s get started with empowering you to make a well-informed investment decision tailored to your financial aspirations.

An overview of SIPs

A Mutual Fund investment plan, known as a ‘Systematic Investment Plan’ or SIP, is a hassle-free and disciplined approach to investing in Mutual Funds, tailor-made to suit both beginners and pro investors. Unlike lumpsum investments, an SIP lets you invest a fixed sum at regular intervals, giving you the flexibility to start with a nominal sum of money, Rs <500> with ICICI Bank SIPs.

SIPs stand out for their simplicity and convenience. With a seamless online platform, you can initiate, track and manage your SIP investments effortlessly. Whether you are planning for your child's education, buying a dream home or planning for retirement, SIPs through ICICI Bank offer diverse plans to cater to your specific financial goals.

Furthermore, SIPs bring the advantage of rupee cost averaging, mitigating the impact of market volatility. This means you buy more units when prices are low and fewer units when prices are high, ultimately lowering your average purchase cost over time.

The SIP amount (as chosen by you) is automatically deducted from your bank through the ECS mandate on a specific day of the month (or any other frequency) and invested in the scheme of your choice until the point at which you terminate the SIP.

A closer look at RDs

While SIPs offer an efficient way to invest, Recurring Deposits present another avenue worth considering in your financial portfolio, especially when compared to SIPs.

RDs, available through ICICI Bank, are a low-risk savings instrument. They are particularly appealing if you prefer a fixed return on your investment over a set period. With RDs, you commit to depositing a fixed sum at regular intervals, typically monthly and in return, you receive a predetermined interest rate.

At the end of the RD tenure, you receive the total amount which includes your principal contributions and the accumulated interest. This can be used for various financial goals, such as funding education, purchasing a vehicle or going on a dream vacation. ICICI Bank iWish Goal Based Savings is a unique flexible deposit that allows you to save for specific goals. You can contribute any amount you like and earn interest on it. It takes less than a minute to open.

Similarities between SIP and RD

Both investment instruments support the idea of frequent (monthly or quarterly) investments. So, SIP or RD which is better? The programmes enable participants to invest modest sums over time and build a corpus.

Additionally, each scheme is reversible at any time. Investors may withdraw their funds when they choose to do so. However, there may be fees associated with an early exit. In some modules, investments are not made consistently, the schemes may be halted and investors may need to restart them.

Difference between SIP and RD

When it comes down to taking a call between these two options, understanding what distinguishes them will help you make an accurate decision:

  1. Guaranteed Returns: RDs offer a specialised deposit plan with guaranteed returns. Investors often have the flexibility to choose from various Recurring Deposit plans that suit their needs.

  2. Risk Factor: RDs are typically low-risk investments and come with security. In contrast, SIP returns can be influenced by market fluctuations. For instance, if you invest in equity funds, your returns may vary based on stock market performance. However, it is important to note that SIPs are an exceptionally good means to strong returns over the long term.

  3. Interest Rate: RDs offer a fixed interest rate, ensuring that investors know the exact amount they will receive at the end of the tenure. In SIPs, returns are linked to market performance; if markets rise, your scheme generates higher returns and the opposite also holds true.

  4. Liquidity: RDs are generally liquid, but some institutions may impose fines on early withdrawal or termination. SIPs, on the other hand, provide flexibility, allowing you to terminate the plans and withdraw funds without such charges.

  5. Lock-in Period: Only SIPs in Equity Linked Savings Scheme (ELSS) have a three-year lock-in period. This means your investment remains locked for this duration. RDs need to be held for a minimum of 6 months.

  6. Tax Considerations: RDs may increase income tax obligations according to the interest earned. SIPs, especially in ELSS, may offer tax benefits.

    Only SIPs in Equity Linked Savings Scheme (ELSS) have a three-year lock-in. It is up to you to select SIP or RD which is better. Additionally, RDs are not tax-friendly from a tax perspective. The rate of income tax you pay is applied to interest earned on an RD.

RD vs SIP: Which should you pick?

By now you’ve understood that recurring deposits and systematic investment plans are viable tools for building wealth. However, it all comes down to risk and returns. When deciding which is better remember that RDs produce a fixed income by the interest rate that the banks choose. However, SIP income will vary because the returns are not predetermined and typically rely on the state of the market, the sorts of securities purchased etc.

A Recurring Deposit may be ideal for risk-averse, cautious investors. A Mutual Fund SIP can be an excellent solution for both conservative and aggressive investors as it is designed for investors with different levels of risk tolerance. Investors need to be aware of their investment goals and risk tolerance before deciding between SIP and RD.

You can utilise free online SIP and RD calculators of ICICI Bank to clearly determine and plan your investments. See how much money you should invest now to receive a specific return later on. Be in the know and see your investments soar.

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