If you were thinking of saving up money for the medium term, say 3 years or more and allow you to invest small a fixed sum on a monthly basis, recurring deposits (RD) of banks would be the one on top of your mind. Of course, in RD there is no risk and its return is granted. But, if you had a minimum of 7-10 years investment time frame and intend to invest small sums regularly, it may not be so lucrative option as last decade average inflation was at 6.5 per cent and it effectively meant that the returns fail to beat the inflation and moreover, its interest is very much taxable could be proved an unattractive option. But here’s a good substitute that not only generates better returns over the long term but is far more tax efficient.
Also Read :Take small steps. But make a start!
Also Read :Take small steps. But make a start!
SIP or Systematic Investment Plan is a very popular mode of investing, mostly monthly or quarterly, of a particular amount in a mutual fund scheme like bank recurring deposits (RD). To put it simply, SIP your money is invested in mutual funds (indirectly in equity) and in recurring deposit though the rate and tenure of investment is fixed but the return is very small as compared to the SIP.
Short-Term Goals
Investments in recurring deposits can only help one achieve short-term financial goals, especially when the money is needed within three to five years. No doubt, if one deposits Rs 5,000 per month in a recurring deposit for five years that yields 9.25 per cent interest, he will get Rs3,81,817 at the end of the maturity can easily achieve his short-term goal like small car etc.
However, it has to be kept in mind that although one can be sure of the maturity value of a recurring deposit, he/she needs to factor in post-tax returns also. Though, the interest income from an RD account exceeds Rs 10,000 in a given financial year, it will not attract any TDS, the onus of paying taxes is on the investor, as the interest earned is taxable at the applicable income tax slab for each individual.
Long-duration Goals
Since, RD is not the best to use to meet long term goals such as education or marriage expenses and final goal of retirement corpus, it would be better to opt for SIPs in some good equity mutual funds. In the long run, Systematic investment plan or SIP of mutual funds pretty much work like an RD. Every month on a specific date you should invest a fixed amount into an MF scheme. You can choose to invest as much as low as Rs500 a month. The funds get invested as per the objective of the scheme you’ve chosen. It could be a debt, equity or debt-equity heavy scheme. SIPs work well for long and medium terms.
Unlike RD you won’t get a fixed rate of return on your SIP investments. While market volatility may impact short-term return, cost averaging helps one earn better return over a long period of time. Under systematic investment plan, one optimizes the returns rather than maximizing them. In case of SIPs in equity funds, there will be no long-term capital gain tax if units are sold after one year from the date of investment. From return as well as tax perspective, it pays well to stay invested in equities for longer duration.
Balance in Portfolio
Since the both instruments belong to different asset classes, a mix of the same helps one maintain proper balance. While the equity portion will help boost growth, the debt portion will ensure necessary stability and assured return. Both Systematic Investment Plan (SIP) in equity funds and recurring deposits in banks are used to create a large corpus over a long period of time. The effect of compounding helps both deliver handsome returns. But, it won’t be fair to compare the two as they belong to different asset classes, namely equity and debt; it is like comparing apples with oranges. It should maintain balance of mix of both to get optimize return and hedge the risk against volatility of market.
Conclusion
If you are someone who is looking to invest small amount of funds at regular intervals and eventually gathers a larger corpus, should be made based on your investment horizon, risk appetite and structure of the portfolio. Hence, the choice between SIP in equity funds and recurring deposits would depend upon your financial targets. But, RD is a good starting point for young investors who have just started out and want assured returns. Liquidity, tax efficiency and superior returns make SIP in equity funds a good supplement to RDs. If you are simply a RD investor, take a third of your monthly surplus kept aside for RD and start an SIP in equity fund. That way you will have a good mix of a guaranteed fixed return product like RD and at the same time, a better yielding product called equity funds.
Suresh Kumar Narula is founder and Principal Financial Planner at Prudent Financial Planners. He has earned the professional CERITIFIED FINANCIAL PLANNER and got registered with SEBI as Investment Advisor. He writes on personal and financial planning articles and got published in Dainik Bhaskar, Business Bhaskar and The Financial Planner’s Guild, India. He is also a member of Financial Planner’s Guild India ( An association of practicing SEBI registered Investment advisers) to create awareness about Financial Planning in general public, promote professional excellence and ensure high quality practice standards. Suresh received his an M.com from Himachal Pardesh University and an MFC from Punjab University, Chandigarh. He can be reached at info@prudentfp.in