RD vs SIP

Full form: Recurring Deposit vs SIP

Savings & Deposits

Recurring Deposit (RD) and SIP are both disciplined monthly savings tools -- but for completely different purposes. RD gives guaranteed returns (6-8%) with full capital safety. SIP delivers market-linked returns (10-14% historically) with capital risk. RD for short-term goals; SIP for long-term wealth.

In detail

RD characteristics:nFixed monthly deposit to bankn6-8% interest, fully guaranteednTenure 6 months to 10 yearsnInterest taxable as incomenNo market risk -- ideal for goals within 3 yearsnnSIP characteristics:nFixed monthly investment in mutual fundn10-14% historically (no guarantee)nNo fixed tenurenTax depends on fund type and holding periodnCapital at risk short-term -- ideal for 7+ year goalsnnWhen to use which:nHome down payment in 3 years: RD (guaranteed, cannot risk losing principal)nRetirement corpus in 25 years: SIP equity (inflation-beating returns essential)nEmergency fund: savings account + liquid fundnChild education in 15 years: SIP equity

Formula

RD maturity = P x (1 + r/4)^(4n) for quarterly compoundingnSIP future value = P x [(1+r)^n - 1] / r x (1+r)nReal return: RD 7% at 6% inflation = 1% real. SIP 12% at 6% inflation = 5.7% real.

Real-life example

🇮🇳 India example

Meena saves Rs 5,000/month for 2 goals: (1) Vacation in 2 years: Rs 5,000/month in RD at 7% for 2 years = Rs 1.29L guaranteed. Perfect. (2) Retirement in 25 years: Rs 5,000/month in Nifty 50 SIP at 12% = Rs 94.9L. If she put both in RD: retirement portion = Rs 44.4L (less than half of SIP). Use the right tool for the time horizon.

Frequently asked questions

Can I do SIP for less than 12 months if I want guaranteed returns? ▼

For less than 12-month goals with guaranteed returns: bank RD or liquid fund. SIP in equity is appropriate only for 7+ year horizons. Short-term equity SIP is not less risky -- equity can fall 30-50% even in 3-5 year periods (2000-2003 Dotcom, 2008-2013 post-crisis). Time is the diversifier for equity risk.