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Is SIP better than RD_

In this inflation-bearing world just investing in Recurring Deposits (RD), Fixed Deposits
(FD), Physical Gold, Savings Deposits, etc. is not enough as their returns cannot beat
inflation. Besides, women are very conservative investors and prefer RD over mutual funds,
however, now its time to upgrade ourselves.

So, what should one do to get inflation-beating returns and get the same ease of investment
as RD? That’s right, you can start investing in equity mutual funds through SIP.
This blog will give you an insight into the difference between RD and SIP.

First, let’s have a look at what is RD and SIP individually.

What is RD?

Recurring Deposit which is popularly known as RD, is one of the famous investment
options in India. It is offered by the post office and many other banks. This investment
option gives investors the flexibility to invest by giving them the option to invest monthly
by choosing the fixed monthly amount, the minimum investment required is ₹100 which
varies from bank to bank.

What is SIP?

SIP is the nickname for Systematic Investment Plan��. Generally, people confuse and thin
that SIP means mutual fund, however, a SIP is not a Mutual Fund’s substitute, nor is it a
Mutual Fund’s category. It is a way of investing a set amount of money in a Mutual Fund on a
regular basis.

When one sets up a SIP, a specific amount is deducted from the bank account monthly. The
deducted amount is then put into a Mutual Fund of their choice, which grows and
accumulates over time.

SIPs are popular because it’s flexible, affordable, and help your money grow. One can start
different types of SIP such as equity, debt, and gold mutual fund schemes with as low an
amount as ₹100. There’s one more way of investing in mutual funds i.e. lump sum

You can also start your SIP with LXME’s well-researched, diversified, and expert-curated
portfolios.

Difference between RD and SIP

ParticularsRDSIP
RiskLowModerate to high depending
on the scheme
Frequency of InvestmentMonthlyMonthly
Interest/ReturnPost Office: 6.7% p.a., and
other RD interest rate varies
from bank to bank
Market-linked returns
Potential to deliver
inflation-beating returns
NoYes, if SIP started in equity
mutual fund
Minimum and maximum
investment period
Minimum – 6 months
Maximum – 10 years
Minimum- 1 month
Maximum – no upper limit
Investment SchemeRecurring DepositCan invest in equity, debt,
and gold mutual fund

As we have seen the difference between RD & SIP now let’s have a look at how your money
grows in both schemes.

Recurring Deposit Vs. SIP

For instance, Radha invests ₹500 per month in RD through the post office for 10 years,
which offers a 6.7% p.a. interest rate. While Deepu invests ₹500 per month in LXME’s
Rs.100 Equity Fund through SIP for 10 years, which offers a 16% p.a.* targeted rate of
return. So, let’s have a look at how Radha and Deepu’s investment grows through the below
chart:

SIP Vs. RD Investment Performance

This is how the money grows in both schemes, evidently, SIP in equity mutual funds can deliver inflation-beating returns over a longer period of time. Through SIP Deepu was able to accumulate ₹62,632 (₹1,48,236 – ₹85,604) more than Radha.

Start your SIP now with LXME’s expert-curated portfolios.

Benefits of SIP

1. Rupee Cost Averaging:

When the market is low, you get more units of your chosen Mutual Fund, and when the market is high, you get fewer units, like Ms. Pari received 100 units in March and 125 units in April. After a period of regular Systematic Investment Planning, your average cost of purchase falls below the scheme’s current NAV. This is known as Rupee Cost Averaging.

2. Low Entry Level:

To invest in SIPs, you don’t need a large sum of money. That is, you can start investing with just ₹100.

3. No need to time the market:

Investing in SIPs on a regular basis allows you to take advantage of Market Volatility while removing the need to time the market. When we invest, one usually aims to buy Low and Sell high (in order to earn profit). However, it is not always easy to buy low, especially when investing in the stock market. When investing through SIPs, however, this is not a concern. It’s because a systematic investment plan (SIP) is a disciplined way of investing in Mutual Funds.

4. The Power of Compounding:

When you invest through a SIP for the long term, you profit from the Power of Compounding. For example, if you put ₹100 in a fund and get 4% interest in the first month, the total value of your funds at the end of the month will be ₹104. Now, in the coming month; you will earn interest on ₹104 & not just ₹100. That is, earning returns over the returns already earned. And this is where the Power of Compounding plays its role!

On the ending note, “Don’t put all your eggs in one basket” i.e. one should always diversify their portfolios against different asset classes such as equity for inflation-beating returns, debt for stability, gold to hedge your portfolio against inflation, and fixed-income instruments to get fixed returns. This way one can manage their risk and grow their investment portfolio.

FAQs

Is SIP taxable?

Yes, the returns you receive are taxable based on which mutual fund scheme you are investing in and for what time period. The taxability applicable is as follows:
If invested in an equity mutual fund and you sell these mutual fund units then the following taxation will be applicable:
– Short-Term Capital Gain (STCG): If capital gain arises within 12 months i.e. 1 year then you will have to pay 15% on the capital gain.
– Long-Term Capital Gain (LTCG): If capital gain arises after 12 months i.e. 1 year then tax will be applicable at the rate of 10% if your capital gain is in excess of 1 lakh.
If invested in a debt or gold mutual fund your returns will be taxable based on your income tax slab rate.

Is RD taxable?

Yes, RD gets no tax exemptions. Income tax has to be paid on the Interest amount received at the rate of the tax slab of the RD holder.

Can I start SIP in a Gold mutual fund with ₹100?

Absolutely, you can invest in a gold mutual fund as SIP with as low an amount as ₹100. You can check out the LXME app and look out for the LXME Rs.100 Gold Saving Fund which is well-researched and curated by experts.

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