SIP vs. Recurring Deposit: Comparing Monthly Investments for Higher Returns

Monthly investments of Rs 20,000 in mutual fund SIPs and bank RDs are compared. SIPs offer potential for higher returns over five years, while RDs provide predictable outcomes. India Post RD offers 6.7% interest, yielding Rs 14.27 lakh after five years.

Many investors invest a fixed amount every month from their earnings to build wealth over time There are many investment schemes available in the market that allow such investors to invest monthly. Two popular investment options where they can invest monthly are mutual funds and recurring deposit (RDs). While in an RD, offered by a bank or a post office, investors can invest a fixed amount every month to get the principal and return back on maturity. In mutual funds, they can invest monthly through the systematic investment plan (SIP) method. There is no maturity period in SIP and investors can redeem the amount when they want. But which of the options can help an investor generate a higher return on a monthly investment of Rs 20,000?

Here's a comparison of Rs 20,000 SIP vs Rs 20,000 RD (SBI and Post Office)

Rs 20,000 monthly investment in SIP

An SIP allows investors to invest a fixed amount in mutual funds every month. They can also increase their investment amount through a step-up SIP.

Mutual funds can be equity, hybrid of debt. But none of them offers a fixed interest rate. While investors pick debt and hybrid funds for stability, they invest in equity to get growth and beat inflation in the long term.

However, equity mutual funds have historically delivered better long-term returns than fixed-income products, although they also carry higher risk.

For better understanding, we have assumed annualised SIP returns (XIRR) ranging from 6% to 12% to calculate the maturity amount from a Rs 20,000 monthly SIP investment over five years. The corpus generated thus can range from Rs 13.96 lakh to Rs 16.22 lakh. See calculations below-

Expected annualised SIP return Corpus after 5 years 6% Rs 13,96,480 7% Rs 14,31,968 8% Rs 14,68,280 9% Rs 15,05,430 10% Rs 15,43,435 11% Rs 15,82,310 12% Rs 16,22,072

Rs 20,000 monthly investment in post office RD

The India Post 5-Year Recurring Deposit (RD) currently offers an interest rate of 6.7% per annum, compounded quarterly.

If you invest Rs 20,000 every month for five years, the estimated return in five years will be Rs 2,27,315 and the total value will be Rs 14,27,315.

Rs 20,000 monthly investment in SBI RD

State Bank of India (SBI) offers an interest rate of 7.05% per annum on a five-year recurring deposit for senior citizens. (The applicable rate for general citizens is lower.)

Like other bank RDs, SBI's recurring deposit provides stable returns, making it suitable for investors who do not want to take a market risk.

If you invest Rs 20,000 every month for five years in the SBI RD, estimated returns at a 7.05% interest rate will be Rs 2,40,553 and the total maturity value will be Rs 14,40,553.

Particulars SIP (Mutual Fund) India Post RD SBI RD (Senior Citizens) Monthly investment Rs 20,000 Rs 20,000 Rs 20,000 Investment period 5 years 5 years 5 years Total investment Rs 12,00,000 Rs 12,00,000 Rs 12,00,000 Return/Interest (6%-12% assumed) 6.7% p.a. 7.05% p.a. Estimated gains Rs 1,96,480 to Rs 4,22,072* Rs 2,27,315 Rs 2,40,553 Estimated maturity value/corpus Rs 13,96,480 to Rs 16,22,072 Rs 14,27,315 Rs 14,40,553

SIP vs RD: Which can generate higher returns?

The answer depends on your investment objective and risk appetite.

SIPs may produce higher returns than RD in the long term. But they may also underperform and produce less returns compared to RDs.

On the other hand, RD returns are predictable. You can estimate the maturity amount at the time of investing.

SIP or RD: Which should you choose?

There is no right answer for this, and the right choice depends on your financial goals, investment horizon and willingness to take market risk.

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