Mutual Fund SIP Versus Recurring Deposit: Understanding the Difference To Maximize Returns – Know Before You Invest
By Lokmat English Desk | Published: March 8, 2024 01:45 PM2024-03-08T13:45:49+5:302024-03-08T13:45:49+5:30
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With the surge in inflation, the significance of investment is heightened, underlining the importance of allocating resources towards future needs. Various investment avenues exist today, catering to diverse preferences. Among these, traditional options like Recurring Deposit (RD) or Fixed Deposit (FD) persist as popular choices favored by a considerable number of investors.
A systematic investment plan (SIP) represents an investment approach characterized by regular contributions of a fixed, modest sum into a mutual fund scheme. While SIP entails exposure to market risks, it also offers a certain degree of flexibility.
RD remain highly favored among investors, especially those adhering to traditional investment methods. RD stands out as a sought-after option providing a fixed return on savings, accompanied by minimal risk. Similar to the SIP, individuals engage in regular contributions to RD as part of their investment strategy.
The duration of a RD can vary from 6 months to 10 years, allowing flexibility according to individual preferences. Presently, opening an RD has been streamlined with the option to do so online via internet banking platforms, simply by requesting through your bank. Alternatively, one can opt for the traditional offline method by visiting the nearest bank branch or post office.
Recurring deposits typically yield returns in the range of 7% to 8%, providing a stable but moderate return on investment. On the other hand, SIPs in equity-oriented schemes have the potential to generate average returns exceeding 12% over extended periods. While recurring deposits offer a reliable yet limited range of options, mutual funds provide a broader spectrum of investment choices.
When it comes to risk assessment, RD are generally perceived as safer compared to SIPs in mutual funds. SBI Securities highlights that the risk of default in bank RDs is very low. Conversely, mutual fund SIPs entail various risks including interest rate fluctuations, default risks, and market volatility, reflecting the inherent uncertainties associated with business environments.
RDs come with a predetermined tenure, typically ranging from a minimum of six months to a maximum of 10 years. Conversely, mutual fund SIPs, apart from schemes like ELSS with a mandatory 3-year lock-in period, generally do not impose any lock-in period. However, there may be an exit load applicable within the initial year of investment, though this can vary depending on the specific mutual fund scheme.
In terms of liquidity, while RDs can be prematurely terminated, doing so incurs a penalty which consequently diminishes the overall return. Conversely, mutual funds offer more flexibility as there are no charges for discontinuing your SIP at any time. Investors have the option to cease their SIP before a specified timeframe without incurring additional costs.
In numerous scenarios, SIPs outperform RDs, particularly in yielding higher returns over long-term investments. Additionally, in equity fund SIPs, returns tend to be more substantial compared to RDs. However, it's important to note that when considering long-term investments, RDs might offer a more secure option compared to SIPs.
