When it comes to systematic investing, SIP (Systematic Investment Plans) and RD (Recurring Deposits) are two popular options. Both cater to different investor profiles, but which one produces higher returns? Go through the detailed comparison between both the schemes.

What is an SIP?

A SIP is a method of investing in mutual funds where investors commit a fixed amount of money at regular intervals. This approach ensures disciplined investing while allowing compounding benefits and rupee cost averaging over time.

How does SIP work?

• The investment amount is auto-debited from the bank account at fixed intervals (monthly, quarterly, etc.).
• Investors receive mutual fund units based on the Net Asset Value (NAV) on the purchase date.
• Each investment adds to the accumulated units, and returns are compounded over time.

Example of SIP in action:

If an investor starts a SIP of Rs 500 monthly, the amount is auto-credited to the mutual fund on a fixed date. Over time, returns grow with market performance and reinvestment of earnings.

Returns on Rs 4,500 monthly SIP over 5 years:

• Monthly deposit: Rs 4,500
• Invested Amount: Rs 2,70,000
• Estimated Returns: Rs 94,966
• Total Value: Rs 3,64,966

What is an RD?

An RD is a fixed-term deposit offered by banks and post offices, allowing investors to deposit a fixed amount monthly. It is a low-risk investment with assured returns at a fixed interest rate.

Key features of RD:

• The minimum monthly deposit is Rs 100.
• The interest rate is 6.7% per annum, compounded quarterly (as of January 2024).
• The standard tenure is 5 years, with an option to extend.
• Premature withdrawal is allowed, but with certain conditions.
• Loan facilities are available against the deposit.

How does RD work?

Investors deposit a fixed amount every month into the RD account, earning interest compounded quarterly. Upon maturity, the total amount, including principal and interest, is paid out.

Returns on Rs 4,500 monthly RD over 5 years:

• Monthly Investment: Rs 4,500
• Invested Amount: Rs 2,70,000
• Estimated Returns: Rs 51,147
• Total Value: Rs 3,21,147

SIP vs RD:  

Both SIP and RD have their own advantages, making them suitable for different types of investors.

• Risk Factor: SIP investments are market-linked and come with moderate to high risk, whereas RD is a safer option with fixed returns.
• Return Potential: SIP has the potential to offer higher returns based on market performance, while RD provides assured but lower returns.
• Liquidity: SIPs offer flexible withdrawal options, whereas RDs have a lock-in period with penalties for early withdrawals.
• Suitability: SIPs are ideal for those looking for long-term wealth creation, while RDs are better suited for conservative investors seeking stability.

For a Rs 4,500 monthly investment over five years, SIP offers higher returns of Rs 94,966, with a total value of Rs 3,64,966. In comparison, RD provides stable returns of Rs 51,147, with a total value of Rs 3,21,147.

If you are fine with market fluctuations and seeking long-term growth, SIP can be the better choice. Where as if you prefer safety and guaranteed returns, RD is considered to be more suitable option. The decision should be based on your financial goals and risk appetite.