Generally speaking, in most scenarios, SIPs outperform RD by a noticeable margin. That said, which investment will give you the best results depends on your financial goals, investment horizon and most importantly, risk appetite. In this blog, we will cover wide-ranging aspects of these two popular investment options in India, including their basics, similarities, differences, pros and cons and more.
Let’s begin with the basics:
What is a Post Office RD?
Short for Recurring Deposit, RD, as the name implies, is a savings scheme where you as an investor deposit a fixed amount of money every month for a total of 5 years in a row. This government-backed fixed income savings scheme lets you earn a fixed (pre declared) interest rate. When the scheme’s tenure ends, you receive the accumulated corpus along with the interest earned on it.
Advantages of a Post Office RD
● Post office RD is backed by the Government of India which makes it a risk free investment.
● The interest remains the same throughout the RD’s tenure, thereby investment outcomes are predictable and remain unchanged, irrespective of market fluctuations.
● By promoting the culture of regular monthly savings, RD makes one a disciplined investor.
● While there’s no maximum limit on monthly deposit, the minimum deposit amount is as low as Rs. 100, making it easy to start and maintain.
● RD is available at post offices across India and the steps to open one involves simple procedures.
● With a 5 year investment horizon, RD stands a good option if you have a medium-term goal.
Limitations of a Post Office RD
● If you opt for early closure of an RD account before the set 5 year period, it may lead to lower interest rate and loss.
● The annual interest rate is (6.7% at the time of writing this blog) which may seem lower than expected for an investor looking for long term wealth creation.
● The interest earned on RD is added to income and taxed at your slab.
● Premature closure is allowed only after 3 years are completed.
● The interest rate is the same regardless of all age groups, including senior citizens.
● One needs to pay penalty charges if monthly contributions are missed (₹1 per ₹100 missed instalment)
What is a SIP?
Short for Systematic Investment Plan, SIP, is an investment method that allows you to invest a fixed sum at regular intervals into a mutual fund of your choice. While monthly SIPs are the most common one, you can choose a preferred investment frequency. The accumulated wealth you gather depends on the fund’s market performance and market conditions over the investment period.
Advantages of SIP
● Since amounts invested are deducted automatically, SIPs form a habit of regular investment. It makes one committed to their financial goals.
● In systematic investment plans, monthly SIPs are generally more popular although you can decide the frequency of investment, such as weekly, quarterly or other available intervals, based on which mutual fund and fund house you choose.
● SIPs are managed by experienced fund managers who make investment decisions on your behalf.
● SIPs are easy to start, flexible and accessible for all including first time investors. They can be set up quickly through mutual fund platforms, apps or banks with small minimum investments. One can begin investing for as low as Rs. 100.
● SIPs can be applicable across a range of funds including equity, debt, hybrid, ELSS etc., thereby matching your risk profile and goals.
Limitations of SIP
● The returns on SIP depend on market conditions and fund performance making it risky and not a preferred option for an investor with low risk appetite.
● A short investment horizon may yield modest or even negative returns so SIPs usually need long term commitment.
● Expense ratios, exit loads, transaction costs etc., can vary from one fund to another, and it can lower one’s net gains.
● Pausing SIP or stopping one entirely may affect your investment goals as it reduces the benefits of long term compounding results.
● Profits from the redemption of SIP mutual fund units are subject to capital gains taxes.
● Investors need to be cautious when choosing a fund since a poor choice may lead to disappointing results.
What are the similarities between SIPs and a PO RD?
When it comes to what makes these two popular investment options similar, possibly the most striking one is that both instil in one the culture of investing a fixed sum of money at regular intervals thus promoting financial discipline. Next, you can begin with small monthly contributions and both are goal-focused and not ad-hoc investment options. Both plans yield the best results when continued for the intended duration without being stopped in the middle.
| When to choose what? | ||
| RD | SIP | |
| Return needs | You want to know the exact maturity amount on day one. | You want market linked returns, although you understand that they aren’t guaranteed.
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| Liquidity needs | You won’t need the money before the strict lock-in period and you can handle a penalty for early exit.
|
You want the option to stop the SIP or withdraw your funds at any time (subject to exit loads).
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| Time horizon | You are a medium term investor and have a particular expense coming in 5 years. | You are a long term investor, perhaps saving for retirement or long term wealth. |
| Risk appetite
|
You want complete visibility into your investment outcomes. | You are risk-tolerant. You understand that markets fluctuate but can deliver higher growth over time. |
Which one is better?
There is no single answer when it comes to which one is better: a Post Office RD and a SIP? If you want capital safety, predictable returns and you have a medium-term financial goal, a Post Office RD can be a good choice.
However, if your objective is long-term wealth creation and you are comfortable with short term market fluctuations, then SIPs may be a good choice since they have shown the potential to deliver higher returns over time.
A lot of investors use both of them. RDs to meet near-term goals with full visibility into future returns, and SIPs for long-term growth. In simple words, things vary based on one’s financial goals, investment horizon and risk appetite.