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Personal finance strategy- Should you invest in SIPs or recurring deposits?


Personal finance strategy- Should you invest in SIPs or recurring deposits?

Personal finance strategies are always individualistic and highly personalized, depending on one’s specific goals and investment objectives. In this context, it is apt to mention that there has been a major debate amongst several investors with regard to putting money in SIPs (Systematic Investment Plans) or RDs (Recurring Deposits). If you take conservative investors into account, they will naturally advocate RDs above all else while a little less risk-averse individual will naturally go for SIPs. These are two of the investment avenues which help in wealth accumulation over the long term through quarterly or even monthly small investments.

What are Recurring Deposits?

Recurring Deposits are debt based financial products. You can set up your recurring deposit account with any post office or bank. You can also choose a fixed amount that will be invested each month for a specific tenor, i.e. between 12 and 120 months on an average. There is always a fixed return rate for recurring deposits which usually depends on the invested amount and the overall tenor. Recurring deposits are ideal for those investors who are averse to any market risks and those who have short-term objectives like taking vacations or buying a vehicle for instance. However, the returns, while they may look impressive, may not be enough when it comes to outstripping inflation in the long run.

What are SIPs?

Systematic Investment Plans enable you to invest in mutual funds. The returns are not fixed from SIPs and they can vary depending on market fluctuations. SIPs have higher levels of risk as compared to RDs although they are safer than many other market based investment avenues. This is because of the fact that SIPs enable investors to overcome any volatility in equity markets through averaging out the investment cost via investments at low/high levels in the market. SIPs are basically all about investing a particular amount in a mutual fund on a monthly basis. It is similar to an RD with the exception that the investment goes to the mutual fund in question.

Some advantages of SIPs

SIPs do come with some advantages including the fact that you can invest in a more disciplined way every month. You can opt for auto debit of the SIP amount from your account each month. Additionally, you can conveniently invest in wealth creation instruments, i.e. you can pay smaller amounts every month and will not have to risk a market investment of a lump sum amount. Additionally, SIPs help you average the purchase cost and brings down timing linked investment risks. As a result, SIPs make it a more transparent and methodical step towards getting an average cost for the investment. Mutual funds enable diversification of the portfolio through investments in several financial instruments.

You can consider investing for the long term and can choose diversified equity funds in this context. You can also consider both debt and equity in a fund just in case you will be investing for a shorter period of time. SIPs offer more flexibility to investors along with higher liquidity and superior returns. The investment procedure could also be easier in some cases. You can easily stop investing in the SIP at any given point of time. You only have to provide an application around 15 days earlier for stopping the SIP. This will not affect the return till the date of operations. In case a recurring deposit is stopped before the tenor gets over, you will not get the returns mentioned at the time you invest.

Also, recurring deposit based returns are fixed and you can earn the same or even higher returns from SIPs. Interest is taxable from RDs while there are lower tax implications of returns from SIPs.

Which is the best option?

See, it all depends on your long-term outlook towards wealth building. RDs are the perfect options for those investors who are in the lower tax slabs and wish for returns which are assured and steady. SIPs, on the other hand, work well for those with cash to spare and those who are not as risk averse. These people can easily reap the benefits of returns higher than inflation through investing in SIPs. SIPs help in creating wealth for the long term which is not that effective with a recurring deposit.

You have to figure out your investment strategy based on the goals that you have and the returns that you wish to garner. All in all, RDs and SIPs are both good methods to accumulate wealth although the latter has slightly more advantages than the former in terms of overall liquidity, returns, flexibility and outstripping the rate of inflation.




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