RD vs SIP: Where to invest? Know advantages and disadvantages of both

RD Vs SIP: If you want to prepare a big fund for the future, you have to remember the mantra of saving and investing. Save a little of your income every month and invest it in a better scheme. Although there are many investment options available nowadays, but whenever it comes to monthly investment, the two schemes that are most mentioned are Recurring Deposit (RD) and Systematic Investment Plan (SIP).

Any person can start investing in both these schemes with even Rs 100.

RD can be started anywhere in bank or post office, whereas money is invested in mutual funds through SIP, hence you need to open a demat account.

The advantages and disadvantages of both RD and SIP are different. If you are also confused about which scheme is better for you, then know about it here.

Recurring Deposit 

First of all, about RD, if you start it in the bank, you can start RD for any period as per your choice - 1, 2, 3, 4, 5 or 10 years.

Interest rates are different in every bank according to the year.

But if you want to start it in post office, you will have to continue investing in it for at least 5 years because post office RD is for 5 years.

The advantage of RD is that you will get guaranteed returns in it.

Since it is a safe investment, many people consider it a better means of saving and investing.

Most of the people save money through RD and take interest on it and then convert the lump sum amount collected through RD into FD.

The amount of monthly RD that you have started, you have to deposit that amount on a fixed date in every case for the entire tenure.

If you close the RD before the completion of its tenure, you have to pay a penalty for it.

In SBI, interest on RD ranges from 6.80 per cent to 7.00 per cent, while senior citizens get 0.50 per cent more interest.

At present, interest is being given on RD in the post office at the rate of 6.7 per cent. 

You can also avail loan or the overdraft facility against RD.

This can be 80 to 90 per cent of your deposit amount.

Tax is levied on the interest received on maturity of RD.

If the interest income on RD is up to Rs 40,000 (Rs 50,000 in case of senior citizens), you do not have to pay any tax on it.

If the income is more than this, a 10 per cent TDS is deducted.

SIP

Now talking about SIP, like RD, you can start with small investment (SIP) also.

But in SIP, money is invested in the market, hence returns cannot be guaranteed.

But still, most experts consider SIP to be the best investment option in terms of wealth creation.

Fund managers manage money invested in mutual funds.

Due to this, the risk is significantly reduced.

Like RD, you can continue investing in SIP for 1, 2, 3, 4, 5 or more periods.

There is no obligation like lock-in period in this. In this, you get flexibility.

You can pause and resume it whenever you want and can withdraw money anytime.

But if you want to earn better profits from SIP, you should continue it for a long time because it has the benefit of compounding and leads to faster wealth creation in the long run.

According to experts, the average return in SIP is around 12 per cent.

Sometimes, it is more than this. If seen in such a situation, this return is much higher than RD.

You can create a good fund through long-term SIP.

In SIP, you get the benefit of rupee cost averaging.

This means that if the market is in decline, you have invested money, you will be allotted more units, and if the market is bullish, you will be allotted less units.

You do not incur losses even if the market falls.

In such a situation, when the market rises, you may get a chance to get better returns on your average investment.