New Delhi: The habit of regular savings is an age-old thing which most of us have been used to hearing from our respective parents. Savings can be more interesting if you are able to invest a proportionate amount of money, be it weekly, monthly, or quarterly, in a scheme which can safeguard it and provide better returns. Bank recurring deposits (RD) and mutual fund systematic investment plan (SIP) are some of the best investment options which can be considered for risk-averse people.
Bank recurring deposit (RD) and mutual fund SIP have different features and conditions which can serve various requirement of people. The end decision to choose between these two investment schemes is based on the expectancy of returns, underlying risk, withdrawal options, taxes and investment objective — long-term or short-term.
The returns on bank recurring deposits (RD) are fixed by banks and banks have the right to change them at their sole discretion while the returns on mutual fund systematic investment plans (SIP) are not fixed and varies from scheme to scheme and market situation. The current rate of interest on bank RD is between 6 per cent and 8 per cent while the average rate of return on equity mutual fund schemes has been somewhere around 11-12 per cent in the last three years.
Bank recurring deposits (RD) are considered risk-free in nature, provided the RD is opened with a scheduled commercial bank regulated by the Reserve Bank of India whereas risk in mutual fund SIP differs from scheme to scheme and the respective underlying assets such as large-cap stocks, small-cap stocks, bonds, government securities, etc,. Bank RD are relatively less risky as compared to mutual fund SIP.
There is a penalty on premature withdrawal from bank recurring deposits while in case of some SIP, an individual can close the scheme and withdraw the money before the date of maturity without paying any extra charges.
The interest earned on both bank recurring deposits and mutual fund SIP are taxed, except a SIP in Equity Linked Saving Scheme (ELSS). An individual can claim a tax deduction of up to Rs 1.5 lakh under Section 80C of the Income Tax Act on starting an investment in ELSS SIP in a year while the long-term capital gains of more than Rs 1 lakh have been taxed at a rate of 10 per cent.
Bank recurring deposits (RD), on a relative basis, are preferred higher for an individual who is aiming for short-term investment while mutual fund SIP is considered better for long-term investing.