Typically, holding money in a Bank Account assures its safekeeping but does not grow. Given that the money held in your Bank Account may lose its value, reducing its purchasing power, thereby raising inflation. Investing helps you grow your money. This increases your money's value, letting you retain your purchasing power despite the rising inflation.
Every investment option has a different return earning potential and risk. Hence, careful consideration is necessary to make a suitable investment. If you want an investment option that lets you make periodic contributions, a Recurring Deposit or RD or Mutual Fund Systematic Investment Plans can be considered.
Let us understand the difference between RDs and Mutual Fund SIPs, helping you make a sound investment decision:
Investment schemes
RD is a simple investment option where you make periodic fixed contributions and build your corpus over time. You earn modest interest from your RDs. Regular, minor, and senior citizens are the different RDs you can open. Mutual Funds are market-linked investment options. You can invest as Lumpsum or SIPs. Equity, Debt, and Hybrid Funds are the different Mutual Funds opted by investors.
Investment amount
You can decide the investment amount, whether you wish to invest in an RD or a SIP. This lets you work towards your financial goals without compromising your affordability. Consider your financial capacity, goals, and obligations to choose a suitable investment amount.
Investment tenure
You can invest in RD for a minimum of six months and a maximum of 10 years. There is no minimum or maximum tenure for Mutual Funds. This means you can invest in both options to achieve any goal, be it short, medium, or long-term. Note that if you are investing in a Mutual Fund like Equity-Linked Scheme Savings, you need to stay invested for a lock-in period of three years. Remember this when determining an investment tenure.
Returns
Returns are the primary difference between RDs and Mutual Fund SIPs. RD earns you returns based on RD interest rates. Given this, your investment earns modest and often predictable interest returns. SIP returns are based on market standing. You may earn decent returns if the market standing is favourable. You could face significant losses if the market standing is unfavourable.
Risks
Since RD is not linked to the market, it is a low-risk investment option. This protects your principal amount and earns you modest interest. This makes RD a perfect investment option if you are a risk-averse investor. As mentioned, SIPs are market-linked investments. Due to this, there is no capital protection and no guarantee of returns. Hence, you should invest in Mutual Funds only if you possess a decent risk appetite.
