5 Tips to Make the Most from RD and SIP Investments

May 15, 2023 / Reading Time: Approx. 8 mins

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For individuals looking to regularly set aside a portion of their monthly earnings towards a financial goal and build wealth in the long term while also safeguarding their investment, the two best options are a Recurring Deposit (RD) and a Systematic Investment Plan (SIP). Both of these investment avenues allow investing a fixed amount periodically to systematically build wealth in the long term. But keep in mind, since these belong to different asset classes or are unique investment products, the wealth creation potential is dissimilar.

What Is a Recurring Deposit?

A Recurring Deposit (RD) is essentially a term deposit offered by banks that enables making periodic deposits and earning interest on the investment made. The RD amount is automatically debited from the Savings Bank Account and credited to the RD account.

The fixed interest rate and regular deposit feature make RD a preferred saving and investment option among investors in India who are averse to taking risks. The interest rate is comparable to that of Fixed Deposits. The interest rate remains constant throughout the term, regardless of market fluctuations.

Banks in India typically offer RDs with a term ranging from six months to ten years, and one can select the term considering the liquidity needs. At maturity, the investor receives the entire sum, including the principal investment and accrued interest.

Most major banks in India accept minimum deposits of Rs 1,000 to open an RD Account.

5 Tips to Make the Most from RD and SIP Investments
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What Is a Systematic Investment Plan?

A systematic Investment Plan (SIP) is a mode of investing in mutual funds. SIPs can be daily, weekly, monthly, or quarterly basis in mutual funds.

A monthly SIP can be initiated with a minimum investment of Rs 500, with standing instructions authorising the bank to deduct the SIP instalment amount from your registered bank account on the chosen SIP instalment date. So, basically, SIPs enable investing a small sum of money regularly and systematically. This is particularly useful when planning for certain long-term financial goals, viz. buying a dream house, children's higher education needs, their wedding expenses, and one's retirement, among a host of other envisioned goals. SIPs help focus on the envisioned goal without worrying about market fluctuations or volatility (as long as the SIPs are in some of the best-performing mutual fund schemes). The inherent rupee-cost averaging feature of SIPs makes timing the market irrelevant and emphasises on 'time in the market'. Thanks to the MutualFundsSahiHai campaign by AMFI that today there is an increased awareness about mutual fund SIPs in India.

Watch this video to know more about the benefits of SIPs:


[Read: 5 Best Equity Mutual Funds for SIP in 2023]

Do SIPs in Debt Mutual Funds make sense? Well, depends on the sub-category of debt funds one chooses to invest as per his/her risk profile and time horizon, but do note that by and large, SIPs return in debt funds could be far more muted than equity funds.

What Are the Key Differences Between RDs And SIPs?

While RDs and SIPs may have a similar approach to investing money periodically, they are completely different. Here are the key differences between the two:

1. The Investment Type:

A Systematic Investment Plan (SIP) is a mode provided by mutual fund houses for investing a fixed sum regularly in mutual fund schemes. Investors have the option to select debt, equity, or hybrid mutual fund schemes based on their risk appetite.

On the other hand, in a Recurring Deposit (RD), a fixed amount every month is deposited to earn a fixed or predetermined rate of interest. So, there is no impact of market volatility on the investor.

2. Risk:

Money invested in mutual fund SIPs are subject to market risk and provides variable returns based on market conditions. Thus, there is a degree of risk to returns and capital. Depending on the category and sub-category of the mutual fund scheme one is SIP-ping in, the degree of risk varies. Thus, it is necessary for investors to set their risk-return expectations right.

[Read: Are You Setting Your Risk-Return Expectations Right While Investing in Mutual Funds?]

RDs, on the other hand, are relatively safe (depending on the bank you have the RD with), offering a fixed interest rate. RD makes a suitable choice for risk-averse investors who do not want to risk their capital for high returns.

3. Returns:

SIP returns are determined by the category of schemes chosen, such as equity, hybrid, debt, etc., the sub-category of the scheme, as well as the mutual fund scheme selection.

In contrast, an RD provide fixed returns in the form of interest (just like Fixed Deposits). Avoid choosing a bank that is offering an exceptionally high return. With higher returns, usually, there is an element of higher risk as well. It is important to choose a bank that is in a sound financial position and run by credible management when opening an RD and not just go by the rate of return offered.

Why RDs And SIPs Are Good Investment Strategies for Young Adults?

Recurring Deposits and Systematic Investment Plans are two popular investment options in India, especially among millennials. Here are the key reasons why young adults consider investing in RDs and SIPs:

  • RDs and SIPs provide an opportunity to save money regularly and create wealth. Young individuals have a longer investment horizon, so they can benefit more from the power of compounding. The earlier one starts investing, the more time one's money has to grow, and the more wealth can be accumulated over time.

  • Investing in RDs and SIPs helps to inculcate a savings habit. Young adults who are just starting their careers may not have a lot of disposable income. However, investing in small amounts regularly can help them save for their financial goals.

  • RDs and SIPs are flexible investment options. One can choose the investment amount he/she wishes to invest, the tenure, and the frequency of investment. This flexibility makes it easier for young adults to invest, even if they have a limited budget or face uncertainties in their careers.

  • Compared to stocks, derivatives, and commodities, RDs and SIPs are relatively better investment avenues enabling regular and systematic investments. Moreover, given that young adults may not have much experience with investing, these avenues provide a good starting point to invest.

Which Investment Option Is Better - RD or SIP?

It would be imprudent to say that one investment option is better than the other as it depends on individual circumstances and financial objectives. It is advisable to evaluate your financial needs, risk tolerance, financial objectives, and investment horizon while choosing between SIPs and RDs.

A set of carefully selected SIPs may be a beneficial investment option if one is willing to take on higher risk and have a longer investment horizon.

On the other hand, for someone who does not want to risk their capital, i.e., are risk-averse and are okay earning less but fixed returns (in the form), an RD could be a viable alternative.

How to Ensure Your RD And SIP Investment Success?

Here are 5 tips to grow your wealth and ensure RD and SIP investment success:

1. Start Early:

The power of compounding works best when one starts investing early. The earlier one starts investing in RDs or SIPs, the more time the money has to grow.

In the case of SIPs, starting early also offers the benefit of rupee-cost averaging in SIPs, which helps to smooth out market volatility and compound wealth over the long term. Here's an example of how the power of compounding in mutual fund SIPs can get a boost when one starts investing early in life:

Let's take an example of two friends, Reena and Rohan;

Particulars Reena Rohan
Age at the time of starting monthly SIP (in Years) 30 35
Retirement Age (in Years) 60 60
Investment Tenure (in Years) 30 25
Monthly SIP (in Rs) 15,000 15,000
12% p.a. Assumed Average SIP Returns 12% 12%
Total Invested Amount (in Rs) 54,00,000 45,00,000
Corpus Built (in Rs) 5,29,48,707 2,84,64,526
The above table is for illustration purposes only.

2. Invest Regularly:

Investing regularly is one of the most important tips to maximise returns, whether choosing RDs and SIPs. Investing regularly -- daily, monthly, quarterly -- aids in power compounding and makes it possible to build a respectable corpus. Hence, never make the mistake of missing or stopping the RD and SIP instalments, as it could put brakes on the process of the power of compounding.

3. Make Sure the Tenure And Plan Align with the Goals:

If the tenure of the RD or SIP instalment of SIP is prudently selected in line with the respective financial goals, there won't arise the need to discontinue making regular investments.

So, say you're planning for a short-term goal which is a few months away or building a rainy-day fund; booking a short-term RD could prove far more sensible than choosing longer tenure and prematurely withdrawing the fixed deposit at a penalty. For long-term goals, it is perhaps prudent to select a longer tenure.

4. Consider Increasing Your Investment Regularly:

When you are doing well in life or earning respectable increments, consider increasing your investments. Doing so is directly proportional to the amount of corpus that can be built. In other words, it accentuates the power of compounding. This is especially true for SIP investments, which could potentially earn better returns.

Let's continue with the same example of Reena and Rohan. Let's assume Reena opts for a Top-up SIP and increases her SIP investment by Rs 10% every year while Rohan keeps it the same throughout the investment period.

Particulars Reena Rohan
Age at the time of starting monthly SIP (in Years) 30 35
Retirement Age (in Years) 60 60
Investment Tenure (in Years) 30 25
Monthly SIP (in Rs) 15,000 (10% increase every year) 15,000
12% p.a. Assumed Average SIP Returns 12% 12%
Total Invested Amount (in Rs) 2,96,08,924 45,00,000
Corpus Built (in Rs) 12,45,26,701 2,84,64,526
The above table is for illustration purposes only.

5. Do Not Withdraw Prematurely:

Premature withdrawal from RDs and SIPs can have a negative impact on the corpus earned. Simply put, it precludes earning a desired respectable corpus as envisaged.

Moreover, premature withdrawals attract a penalty in the case of RD. And with respect to SIPs, there could be an exit load that could eat into the returns.

To conclude:

Investing in Recurring Deposits (RDs) and Systematic Investment Plans (SIPs) could be meaningful avenues to save and invest. But one should choose these avenues considering one's age, risk profile, broader investment objective, financial goals, and the time in hand to achieve these goals (short-term, medium-term, and long-term).

By carefully choosing a combination of RD and mutual fund SIPs, investors can create a balanced investment portfolio that maximises returns while minimising risk.

Happy Investing!


KETKI JADHAV is a Content Writer at PersonalFN since August 2021. She is an MBA (Finance) and has over seven years of experience in Retail Banking. Ketki specialises in covering articles around banking, insurance, personal finance, and mutual funds and has been doing it for over three years now.

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.

Disclaimer: This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision.

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