What is the difference between SIP and recurring deposit?

What is a systematic investment plan (SIP)?

A Systematic Investment Plan (SIP) is a strategic approach to investing in mutual funds. It's similar to a financial fitness regime, where investors allocate a fixed sum of money at regular intervals (monthly, quarterly, etc.) into a chosen mutual fund scheme.

The SIP approach instils discipline as it encourages investors to continue investing even during market fluctuations. Additionally, SIP investments harness the power of rupee-cost averaging, allowing you to buy more units when prices are lower and fewer units when prices are higher. This strategy mitigates the impact of market volatility, leading to relatively better return potential over the long haul.

Two popular avenues have emerged as potential stepping stones to financial growth – Systematic Investment Plan (SIP) and Recurring Deposit (RD). Both the options offer small investors a way to nurture and compound their wealth over time.

However, SIP and RD work in different ways. In this article, we will discuss the SIP vs Recurring Deposit dilemma and understand the inner workings of both these investment strategies.

• Table of contents

1. What is a recurring deposit (RD)?
2. Which is a better investment choice?
3. Bajaj Finserv AMC
4. FAQ

What is a recurring deposit (RD)?

On the other side of the wealth-building spectrum, we have Recurring Deposits (RDs). An RD is a type of investment offered by banks, allowing you to deposit a fixed amount of money at regular intervals, similar to SIPs.

However, instead of investing in market-linked assets like mutual funds, RDs park your funds in fixed-income instruments, which generally offer a predetermined interest rate. The tenure of an RD is fixed, and at the end of this period, you receive the initial deposits along with accumulated interest. RDs provide stability but may not necessarily keep pace with inflation, potentially affecting the real-world value of your returns.

Which is a better investment choice?

Let us take a look at some of the key points of the SIP vs Recurring Deposits debate:

• Risk and return: SIPs and RDs tread different paths when it comes to risk and return. While SIPs expose you to fluctuations in the financial markets, RDs provide a fixed (albeit relatively lower) return. The inherent risk in SIPs can lead to potentially higher rewards, offering the possibility of inflation-beating returns over the long run.

• Flexibility: SIPs offer more flexibility, allowing investors to start with relatively lower amounts and gradually increase investments. On the contrary, RDs demand consistent contributions. Also, the option to modify SIP amounts as per your financial situation adds a layer of adaptability that RDs lack.

• Liquidity: SIPs offer a higher level of liquidity as compared to RDs. In SIPs, you can redeem your mutual fund units partially or completely as per your needs. However, RDs usually come with penalties for premature withdrawals, making them less liquid.

Conclusion
The choice of whether to invest in SIP or opt for a Recurring Deposit requires careful consideration. SIPs present the prospect of harnessing the potential of the market to yield relatively better return potential over time. On the flip side, RDs offer stability but might not match the returns needed to beat inflation. Remember, each individual's financial goals, risk appetite, and investment horizon are unique. Therefore, it is wise to consult a financial advisor for tailored guidance based on your circumstances. Whichever investment path you choose, the key lies in making informed decisions that align with your aspirations.

Bajaj Finserv AMC

Bajaj Finserv AMC has launched schemes including a flexi-cap fund, liquid fund, overnight fund, arbitrage fund, and money market fund. Each of these investment options provides professional management and potential for returns. However, it is important for investors to assess their investment objectives, risk tolerance, and consult a financial advisor before making any mutual fund investments.

FAQs:

What is SIP, and how does it differ from a Recurring Deposit (RD)?
A Systematic Investment Plan (SIP) is an investment method where you regularly invest a fixed amount in mutual funds, providing the potential for market-linked returns. An RD is a savings scheme offered by banks where you deposit a fixed amount regularly, and it earns a predetermined interest rate.

Which one offers potentially higher returns, SIP or RD?
SIP in mutual funds has the potential to offer reasonable returns than RD because it invests in the financial markets, which may yield better returns over the long term. RD, on the other hand, provides fixed, predetermined interest rates

What are the differences in terms of liquidity between SIP and RD?
SIPs in mutual funds typically offer relatively higher liquidity as you can withdraw your investments partially or fully at any time. RDs, however, may have penalties for premature withdrawals and limited liquidity.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.