Introduction
Wealth creation comes down to consistent savings and thoughtful investments over a long period. If you are looking for investment avenues that allow you to maintain a disciplined approach, SIP and RD are suitable choices. Both Systematic Investment Plans (SIP) and Recurring Deposits simplify the act of regular investing. They let you make periodic payments that attract returns over time. But which one should you choose between SIP and RD in volatile markets? Read on to figure out.
SIP vs RD: Understanding the meaning
SIP is a way to invest in Mutual Funds at regular intervals instead of a lump-sum amount. You can invest a fixed sum you choose regularly i.e., monthly, quarterly, etc. Through SIP, you can have flexibility in investing every month while taking advantage of the stock market's potential for growth over time.
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RD is a form of term deposit that banks and financial institutions offer. It is considered a fixed-income scheme, as the returns are predetermined and guaranteed. You can deposit a fixed sum each month for a specific pre-decided duration based your comfort. Once the term ends, you receive the total investment amount with the interest earned.
Performance of Recurring Deposit Vs SIP in volatile markets
Recurring Deposits are low-risk investments that offer fixed income regardless of market activity. Hence, market volatility does not have any direct impact on the returns you earn from RD. Even before you invest, you would know the return you can expect. Hence, RDs perform consistently even in volatile markets.
The investments made through SIPs are directly linked to the Equity and Debt markets, depending on the Mutual Fund structure. Hence, a volatile market can have a drastic impact on SIP returns. On the bright side, SIPs have a built-in mechanism to combat this – Rupee Cost Averaging. Under this concept, your investment is directed towards more units when the market is low and fewer units when the market is high. This way, your cost of investment per unit gets averaged out. As a result, the impact of volatile markets gets reduced, while increasing the potential of long-term returns.
Key differences between SIP and RD
Some of the critical points of difference between SIP and RD are as follows:
· Investment duration
You can invest in Mutual Funds through SIP for varying durations. It's totally up to your discretion. You can adjust the investment terms based on your goals and market conditions. On the other hand, RD comes with a fixed tenure ranging from six months to ten years.
· Minimum capital required
Both RD and SIP allow you to start your investment journey with a minimum capital. You can invest as low as Rs. 500 through SIP. As for the minimum deposit in RD, the requirement is subject to banks. Some let you start with Rs.100, while others may have Rs.1,000 as the minimum criterion.
· Returns Calculation
Since the returns on investments made through SIP depend on the performance of underlying assets in Mutual Funds, the returns are unpredictable. They are calculated based on the market-linked results. With RDs, you get guaranteed returns. They are based on the investment amount, term, and interest rate.
· Liquidity
Mutual Funds are highly liquid, and you can halt your SIPs when you deem fit without any restrictions. However, you may incur an exit load, depending on the type of Mutual Fund Scheme. Although RDs are designed for fixed tenures, you can withdraw funds whenever required, subject to a penalty.
· Risk
The direct link of SIPs with the market puts them at an inherent risk. Market fluctuations can offer higher returns but also result in losses. Conversely, RDs are risk-free deposits, as they earn returns based on a predetermined interest rate.
· Taxability
The returns from SIP investments attract capital gains when they exceed Rs. 1 lakh. Long-term capital gains at 10% and short-term capital gains at 15%. The earnings from RD get taxed as per your income tax slab. Also, If the interest income is higher than 10%, it is subject to TDS.
Which is Better: SIP or RD
Now that you have learned how SIP and RD work, their performance in volatile markets, and distinction, you can choose what works better for you. As each of them has their benefits and shortcomings, one is not necessarily better than the other. The perfect fit for you depends on your investment goals, risk tolerance, and financial needs.
If you prefer a safe, predictable, and guaranteed-backed investment, RDs may be a solid choice. On the other hand, if you seek appreciable returns in the long run which is linked to market performance with some level of risk, you can opt for SIPs. You may also go for a mix of both. Have SIPs for a slightly more confident investing strategy and RDs for assured returns.
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