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In August 2022, Rs 12,693 crore entered mutual funds (MF) through systematic investment plans (SIP), the largest monthly SIP inflow in MF history. Obviously, over time, many investors have recognized the benefits of ladder investing. But there is another way to systematically invest. Although the returns are modest, the risk is much lower than with a mutual fund. This is called a recurring deposit and you can invest through your bank. It’s worth it?
What is a recurring deposit?
Recurring Deposits (RD) are debt instruments that offer investors capital security.
Banks offer DRs for terms ranging from 1 to 10 years. The tool allows investors to invest a fixed amount each month and build a corpus for short-term needs. It works like the SIP of a mutual fund. Investing in R&D brings discipline. The problem is that, like an MF SIP, you must have money to invest at the end of each month.
RDs are taxable. Neither the money invested nor the interest earned is tax-free, and both are taxed according to the Tax Board.
RDs and SIPs work on the principle of periodic reversals. They allow investors to invest small amounts over a period of time and build a corpus. They also offer great flexibility.
You can stop your RD and SIP and withdraw your funds at any time. However, some banks may impose penalties for early withdrawals from your RD account. “Both investors need to be consistent with investments as RD and SIP can expire and need to be reset if payments are not made,” said Adhil Shetty, CEO of BankBazaar.com.
flexibility
SIP MFs offer more flexibility. You can invest in it daily, weekly, fortnightly, monthly, quarterly or annually. Unlike an RD, which is similar to a debt instrument, MFs also allow you to invest in stocks via SIP. “Investing through SIP is a better way to participate in the stock market, as it offers an average cost in rupees, which is the best way to build long-term wealth, especially for investors with a fixed monthly income,” says Amol Joshi, founder. of the Rupee Plan -Investments. Services.
“The amount of SIP invested in the stock market is the right tool to build the long-term corpus. In general, SIPs work best when you’ve been invested for at least 5 years or more,” says Shetty. However, keep in mind that SIP returns on stock funds are volatile because they are tied to the market.
RDs come with a lock; You cannot withdraw your investments before the end of the term. That can be from 1 to 10 years.
On the other hand, you can easily stop or withdraw your SIPs. Only SIPs in the Equity Linked Savings Schemes (ELSS) have a three-year vesting period. In an ELSS scheme, each SIP is blocked for three years. Simply put, your payment is staggered just like your monthly investments. “Non-ELSS funds generally don’t have a lock-in period, but some may charge an exit fee if you decide to exit the fund within a year,” says Shetty.
“SIPs do not offer capital protection and the cyclicality of the market can wipe out your short-term savings before they are rebuilt, as we saw in the Covid years,” she adds.
RDs are taxable. Neither the money invested nor the interest earned is tax-free, and both are taxed according to the Tax Board. The interest earned on DRs tends to be lower than inflation. After taxes, this return can be negative. Therefore, it may not be the right tool for long-term investing.
Are guaranteed returns better?
In general, we like guaranteed returns. But they look good if you don’t want to take any risk or have zero to negligible risk tolerance. In this case, too, your return expectations should be low. “RDs provide principal protection, which can be important when saving in the short term,” says Shetty.
“The Deposit Insurance and Credit Guarantee Corporation, a subsidiary of the central bank, guarantees DR investments up to Rs 5 lakh,” says Joshi. There is no such security when investing in MF via SIP.
On the other hand, the returns of the SIPs are linked to the market. When the markets go up, your MF system makes more money, and vice versa. Over a long period of time, stock funds tend to outperform bond funds.