5-year financial goal: Should you invest in SIP or RD?

New Delhi: For someone with a predetermined goal to be achieved within a fixed time, it is important to save money somewhere safe that can generate returns at the same time. More often than not, investors choose either a Recurring Deposit (RD) or a Systematic Investment Plan (SIP) because of the potentially higher returns the two can generate, with SIP carrying the potential of more gains with enhanced risks.

RD and SIP both work on the principle of setting aside some money to invest each month. However, the nature of the investment and the growth of money differ completely. The returns are thus significantly different from each other.

Where you decide to put the money depends on your goals, preferences, and appetite for risk. The core choice you would have to make depends on whether you prefer higher returns with potential risk or guaranteed but limited returns.

Recurring Deposit

As part of a Recurring Deposit, the investor puts a fixed amount into a bank or post office account. The returns are generated through interest, whose rate is fixed at the beginning. Thus, the total value of the corpus at the end of the tenure is predictable and guaranteed.

Systematic Investment Plan

SIP is a way to invest money in mutual funds rather than a tool of investment in itself. Under an SIP plan, a fixed amount goes into mutual funds at regular intervals. This pool of money is then allocated by fund managers to buy assets such as equity funds, hybrid funds, and debt funds, etc. An equity mutual fund invests money in shares. The returns are thus linked to the market and depend on the performance of the shares.

Markets go through ups and downs. However, a longer investment tenure may give such short-lived fluctuations more time to even out and reduce the chances of loss. The trade-off with an SIP becomes apparent when share prices are down at the time the investor wants to redeem the money.

SIP vs RD

For someone with a fixed goal that is five years away, such as wedding expenses, a foreign vacation, or a car, an RD may prove to be a safer option with guaranteed returns. If the investment is well planned, keeping in mind the maturity period and the expected corpus by the end, someone who cannot deal with the highs and lows of the market should invest in an RD.

However, the returns can be considerably lower than the gains from equity mutual funds. The limited returns would also be subject to tax under the applicable tax slab.

An SIP might be suitable for someone who is experienced in market investments or can readily tolerate market volatility. For such a person, the prospect of higher returns is more important than the risk to the funds.

Yet, for a fixed goal and with an adequate amount to invest every month, an RD would be a safer choice, while an SIP would be best for long-term goals and wealth creation.