Bank Fixed Deposits and Mutual Funds are the two most popular investment avenues for retail investors in India. RD or Recurring deposits and mutual fund SIPs are essentially deposit plans from your regular savings which goes to bank RD and mutual fund schemes respectively. Both RD and SIPs are used by large numbers of investors. In this article we will compare these two plans – SIP vs RD- so that you can make informed investment decisions.
Systematic Investment Plan or SIP is a mutual fund investment plan where an investor can invest a fixed amount in a scheme of his / her choice at regular intervals (weekly, fortnightly, monthly etc). To start a SIP, you have to submit a bank ECS mandate along with the SIP application form. Different fund houses offer a variety of choices of SIP debit dates. Through the ECS mandate, the SIP amount (as specified by you) automatically gets debited from your bank on a particular day of the month (or any other frequency) specified by you and gets invested in the scheme of your choice till the time you stop the SIP. Minimum SIP amounts are usually Rs 500 or Rs 1,000.
If you compare SIP vs RD, RD is a term deposit plan offered by banks in which you can make regular deposits and get interest on it. The tenure of an RD can range from 6 months to 10 years. To open an RD account, you need to provide standing instruction to your bank to debit fixed amounts from your savings bank account and credit it to the RD account. The interest rates of RD and FD are usually the same if the tenure is same. Interest earned by RD keeps accruing and is paid in lump sum along with the principal amount on maturity. Depending on the interest, the bank may deduct TDS on interest from your RD account. RD interest is taxed as per the income tax rate of the investor.
The main difference between SIP and RD is with respect to the underlying asset. The underlying asset in case of an SIP is a mutual fund scheme, whereas that in an RD is a bank term deposit. The main differences are as follows:-
RD provides assurance of capital safety. You will get principal and interest accrued on maturity of your RD.
Mutual fund SIPs are subject to market risks. There is no assurance of capital protection in SIPs.
RD gives assured returns. The interest paid by an RD is fixed over the investment tenure and is paid out to investors on maturity.
Mutual fund SIPs are market linked. There is no guarantee of returns in SIPs. SIP returns will depend on the performance of the underlying assets of the fund.
Average RD interest rate over last 10 years was 7.6%.*
Historical long term returns of SIP in both equity and debt funds have usually been higher than bank RDs interest rates. Over the last 10 years (period ending 15th July 2020) Nifty 50 TRI has given 8.3% CAGR returns.^
The maturity amount of Rs 10,000 monthly RD of 10 year tenure (ending 15th July 2020) would have been Rs 17.42 lakhs.
|The market value of Rs 10,000 monthly SIP in Nifty 50 TRI over the same period would have been Rs 25.28 lakhs (As on 15th July 2020).
Interest paid by RD is taxed as per investor’s income tax.
Long term capital gains in equity mutual fund SIPs (investment holding period of 12 months or more) are tax exempt up to Rs 1 lakh in a FY and taxed at 10% thereafter. Long term capital gains in debt funds (investment holding period of 36 months or more) are taxed at 20% after allowing for indexation benefits.
Tax applicability during the investment tenure
RD interest is taxed during the tenure of the investment. You need to add the RD interest earned in a financial year to your income when you file tax returns and pay income tax accordingly.
SIP returns are not taxed during the investment tenure. Incidence of taxation in SIP arises only on redemption. However, if you opt for dividend option in SIPs, then dividends paid to you will be added to your income and taxed according to your income tax slab.
In this article, we discussed how the two popular investment options, SIPs and RDs work and which is better SIP or RD. While they are similar in many respects, there are fundamental differences between difference between RD and SIP - The foundational difference between the two is in terms of risk and return. RDs are risk-free investments while SIPs are subject to market risks. The potential returns of mutual fund SIPs compared to RDs are higher. Mutual funds also enjoy considerable tax advantage over RD. That answers the question, SIP or RD which is better.
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