Recurring Deposit vs SIP: Which is Better for Monthly Savings?
A detailed comparison of Recurring Deposits and Systematic Investment Plans to help you choose the right monthly savings option based on your goals, risk appetite, and timeline.
Both Recurring Deposits (RD) and Systematic Investment Plans (SIP) let you invest a fixed amount every month. But that's where the similarity ends.
One offers guaranteed returns with zero risk. The other offers potentially higher returns with market volatility. Which is right for you? Let's compare.
Quick Comparison: RD vs SIP
| Feature | Recurring Deposit | SIP (Mutual Fund) |
|---|---|---|
| Returns | 6-7.5% (guaranteed) | 10-15% (market-linked) |
| Risk | Zero | Medium to High |
| Lock-in | Tenure-based (6 months to 10 years) | None (except ELSS: 3 years) |
| Taxation | Interest taxed at slab rate | LTCG: 12.5% above ₹1.25 L |
| Best for | Short-term goals, risk-averse | Long-term wealth creation |
| Minimum | ₹100/month | ₹100-500/month |
How RD Works
A Recurring Deposit is like an FD with monthly installments. You commit to depositing a fixed amount every month for a fixed tenure.
RD Mechanics
| Feature | Details |
|---|---|
| Interest calculation | Quarterly compounding |
| Tenure options | 6 months to 10 years |
| Current rates | 6.5-7.5% (varies by bank) |
| Premature withdrawal | Allowed with penalty (0.5-1%) |
| TDS | Yes, if interest > ₹40,000/year |
Example: ₹10,000/month RD for 5 Years
At 7% interest rate:
- Total deposits: ₹6,00,000
- Interest earned: ₹1,19,837
- Maturity value: ₹7,19,837
Calculate your RD: Use our RD Calculator to see exact maturity amounts.
How SIP Works
A Systematic Investment Plan invests your monthly amount in mutual funds. The units you buy vary based on market price (rupee cost averaging).
SIP Mechanics
| Feature | Details |
|---|---|
| Returns | Market-linked (10-15% historical equity) |
| NAV-based | Units allocated at current NAV |
| Tenure options | No fixed tenure (invest as long as you want) |
| Withdrawal | Anytime (except ELSS) |
| Taxation | STCG: 20%, LTCG: 12.5% above ₹1.25 L |
Example: ₹10,000/month SIP for 5 Years
At 12% expected return:
- Total investment: ₹6,00,000
- Expected gains: ₹2,23,391
- Expected value: ₹8,23,391
Calculate your SIP: Use our SIP Calculator to project your wealth growth.
Returns Comparison: RD vs SIP
Let's compare ₹10,000/month invested over different time horizons:
3-Year Comparison
| Metric | RD (7%) | SIP (12%) |
|---|---|---|
| Total invested | ₹3,60,000 | ₹3,60,000 |
| Maturity/Value | ₹4,00,895 | ₹4,35,076 |
| Gain | ₹40,895 | ₹75,076 |
| Gain % | 11.4% | 20.9% |
SIP advantage: ₹34,181 (but with volatility risk)
5-Year Comparison
| Metric | RD (7%) | SIP (12%) |
|---|---|---|
| Total invested | ₹6,00,000 | ₹6,00,000 |
| Maturity/Value | ₹7,19,837 | ₹8,23,391 |
| Gain | ₹1,19,837 | ₹2,23,391 |
| Gain % | 20.0% | 37.2% |
SIP advantage: ₹1,03,554
10-Year Comparison
| Metric | RD (7%) | SIP (12%) |
|---|---|---|
| Total invested | ₹12,00,000 | ₹12,00,000 |
| Maturity/Value | ₹17,40,896 | ₹23,23,391 |
| Gain | ₹5,40,896 | ₹11,23,391 |
| Gain % | 45.1% | 93.6% |
SIP advantage: ₹5,82,495
The longer the horizon, the more SIP outperforms RD.
Risk Comparison
RD Risk: Virtually Zero
- Capital is guaranteed
- Interest rate is fixed at opening
- Bank deposits insured up to ₹5 lakh (DICGC)
- Worst case: Bank failure (rare, and you're insured)
SIP Risk: Market Dependent
- Capital can decrease in short term
- Returns vary based on market conditions
- No guarantee of positive returns
- Worst case: 30-50% temporary decline (recovers over time)
Historical SIP Drawdowns
| Period | Nifty 50 Decline | Recovery Time |
|---|---|---|
| 2008 (Global crisis) | -52% | 2 years |
| 2020 (COVID) | -38% | 6 months |
| 2022 (Rate hikes) | -15% | 8 months |
Key insight: SIP investors who continued during crashes saw the best long-term returns.
Tax Treatment: A Critical Difference
RD Taxation
RD interest is taxed at your income tax slab rate—making it expensive for high earners.
| Tax Bracket | RD Rate | Post-Tax Return |
|---|---|---|
| 0% | 7% | 7.0% |
| 5% | 7% | 6.65% |
| 20% | 7% | 5.6% |
| 30% | 7% | 4.9% |
At 30% tax bracket, your 7% RD effectively becomes 4.9%.
SIP Taxation (Equity Funds)
Equity SIPs have more favorable taxation:
| Holding Period | Tax Rate | Exemption |
|---|---|---|
| < 1 year (STCG) | 20% | None |
| > 1 year (LTCG) | 12.5% | ₹1.25 L/year |
Example: If you earn ₹2 lakh LTCG in a year:
- Taxable: ₹2,00,000 - ₹1,25,000 = ₹75,000
- Tax: ₹75,000 × 12.5% = ₹9,375
- Effective tax rate: 4.7%
For long-term investors, SIP is significantly more tax-efficient.
When to Choose RD
1. Short-Term Goals (Under 3 Years)
If you need the money in 1-3 years, RD protects you from market volatility.
Examples:
- Building emergency fund
- Saving for vacation
- Down payment in 2 years
2. Zero Risk Tolerance
If market fluctuations cause you anxiety or you can't afford any loss, RD is safer.
3. Senior Citizens
For retirees living on fixed income, RD provides predictable returns without market stress.
4. Specific Target Amount Needed
If you need exactly ₹5 lakh in 3 years for a specific purpose, RD guarantees you'll hit the target.
When to Choose SIP
1. Long-Term Goals (5+ Years)
For goals beyond 5 years, SIP's higher returns compound significantly.
Examples:
- Retirement corpus
- Child's education (10+ years away)
- Wealth creation
2. Can Handle Volatility
If you can stay invested during market drops without panic-selling, SIP rewards patience.
3. Higher Tax Bracket
At 30% bracket, SIP's tax efficiency gives it a larger advantage over RD.
4. Want to Beat Inflation
At 6% inflation, a 7% RD gives 1% real return. A 12% SIP gives 6% real return.
The Hybrid Approach
You don't have to choose one. Combine both based on goals:
| Goal | Timeline | Instrument | Monthly Amount |
|---|---|---|---|
| Emergency fund | 1 year | RD | ₹10,000 |
| Vacation | 2 years | RD | ₹5,000 |
| Child's college | 10 years | SIP (equity) | ₹15,000 |
| Retirement | 20 years | SIP (equity) | ₹10,000 |
This gives you:
- Guaranteed corpus for near-term needs
- Growth potential for long-term goals
Common Mistakes to Avoid
With RD
- Ignoring inflation - 7% RD with 6% inflation = 1% real growth
- High TDS - Consider tax-saver FD for 80C instead
- Breaking RD early - Penalty erodes returns; plan tenure correctly
With SIP
- Stopping during market crash - Worst time to stop; best time to continue
- Expecting guaranteed returns - Past performance ≠ future results
- Too short a horizon - Don't SIP for goals under 3 years
- Choosing wrong fund - Match fund type to goal horizon
Decision Framework
Answer these questions:
1. When do you need the money?
- Under 3 years → RD
- 3-5 years → Either (or hybrid)
- 5+ years → SIP
2. Can you handle a 30% temporary drop?
- No → RD
- Yes → SIP
3. What's your tax bracket?
- 0-5% → RD is fine
- 20-30% → SIP more tax-efficient
4. Do you need a guaranteed amount?
- Yes → RD
- No, growth matters more → SIP
Conclusion
There's no universally better option—it depends on your goals:
| Choose RD When | Choose SIP When |
|---|---|
| Goal is under 3 years | Goal is 5+ years away |
| You need guaranteed returns | You want higher growth |
| You can't tolerate volatility | You can handle market swings |
| Building emergency fund | Building retirement corpus |
For most young investors with long-term goals, SIP makes more sense. For specific short-term targets or risk-averse investors, RD provides peace of mind.
The best approach? Use both strategically.
Calculate your returns:
- RD Calculator - See your guaranteed RD maturity amount
- SIP Calculator - Project your SIP wealth growth