Difference between SIP and recurring deposit

10 Differences between SIP and Recurring Deposits

Millions of Indians have been using recurring deposits offered by banks and post offices for savings for many years now. As the popularity of SIP grows, understanding the difference between an SIP and a recurring deposit is important. We shall look into the key differences between these two financial instruments in this article

Recurring Deposits

People put their money in recurring deposits to save. Indians have traditionally been big savers and the recurring deposit fits into our behaviour. A recurring deposit facility is offered by banks and post offices. Depositors agree on a monthly deposit amount and the deposit term.

Let’s understand more about the recurring deposits offered by the State Bank of India. SBI recurring deposits can be started for as low as ₹100 per month.

The duration of the recurring deposit can range from 12 months to 120 months (10 years). The interest offered is between 6% to 7% and interest is compounded quarterly. And the best part is that the interest will remain constant for the duration chosen.

Fixed deposits are the most popular wealth creation tool amongst Indian. To help investors, we have compiled the fixed deposit interest rates of 41 Indian banks in the linked article.

So, my point here is that in addition to it being a habit forming saving tool, recurring deposits help you earn some returns (interest) aswell. The interest rates are guided by the Reserve Bank of India’s monetary policies which can change in the future.

Systematic Investment Plans (SIP)

We have discussed quite a bit about SIPs in previous articles. I am linking our three most read articles on SIP for your benefit.

  1. The Complete Investor Guide to Building Wealth with SIPs
  2. Best Mutual Fund SIPs to Invest in 2020
  3. How Axis Focused 25 Fund became India’s Best SIP Mutual Fund

Differences between Recurring Deposit and SIP

There are 10 key factors that highlight the differences between an SIP and a recurring –

  1. Safety of Capital
  2. Tenure
  3. Return
  4. Liquidity
  5. Expense Ratio
  6. Risk
  7. Premature Withdrawal
  8. Taxation
  9. Tax deducted at source
  10. Loan facility

The below table lists down the differences between an SIP and a Recurring Deposit.

FactorSystematic Investment Plan (SIP)Recurring Deposit
Safety of CapitalProne to risks due to stock market movements (equity) and credit & interest rate risk (debt)Safe. Centre guarantees safety of upto ₹5,00,000
Tenure1 day to no time limit6 months to 10 years
ReturnDepends on type of instrument chosen; ability to offer inflation-beating high returnsFixed as per locked-in interest rate
LiquidityVery liquidLiquid if the recurring deposit chosen has premature withdrawal option
Expense Ratio0.2 to 2.5%None
RiskLow to Very HighAlmost None
Premature WithdrawalExit load of upto 1% applicable on units redeemed before 1 yearPossible but with premature withdrawal penalty
TaxationApplicable at current tax slab if redeemed within 3 years; post 3 years indexation benefits applyApplicable at current tax slab
Tax Deducted at SourceNo deductedTDS is deducted on the interest
Loan FacilityPossible at the discretion of the financier. Generally upto 50% for equity mutual fundsYes. Can be availed upto 90% of deposited amount

Advantages of Recurring Deposit over SIP

As I write this article, here are the recurring deposit rates offered by the State Bank of India –

Tenure Regular Interest Rate Senior Citizen Interest Rate
1 to 2 years 6.70% 7.20%
2 to 3 years 6.75% 7.25%
3 to 5 years 6.80% 7.30%
5 to 10 years 6.85% 7.35%

A monthly deposit of ₹1,000 on a 10-year recurring deposit will eventually yield a maturity corpus of ₹1,70,673.

Recurring deposits do have their advantage of them being extremely safe as the money is deposited in a bank or post office which in turn invests your funds in safe debt and money market instruments.

And don’t forget this. The rate of interest is locked and the investor does not have to worry about sudden drop in interest rate in the future.

Advantages of SIP over Recurring Deposits

  1. Returns – SIPs have the ability to deliver better returns than recurring deposits. Investors can use many SIP strategies like rebalancing, direct mutual funds, index funds etc. to generate high risk-adjusted returns
  2. Tax benefits – Recurring deposit interest income attracts tax deducted at source if interest income exceeds ₹10,000. The interest income from recurring deposits is also added to your tax returns and used in determining one’s tax slab. On the other hand, SIPs are more tax efficient. Short term capital gains on equities are only 15%. Long term capital gains on equities are even lower at 10% & apply only if the long term capital gains exceed ₹1,00,000 in a financial year. In case of debt mutual funds, long term capital gain is 20%. But wait .. you can always use indexation benefits to reduce the tax outlay.
  3. Penalty – There are no penalties for missing an SIP instalment. However, if you miss a recurring deposit instalment, usually a penalty is levied by the bank. Again, if you wish to withdraw before maturity, there will be some penalty there.

Additional Resources

  1. 5 Steps process on how to start SIP investment online
  2. The best SIP plans to invest in 2020
  3. Top SIPs for long term investing
  4. Complete Investor Guide to Building Wealth with SIP
  5. SIP Calculator