RD vs FD vs SIP: where should your monthly savings go?

The three options in one line each

An RD and an FD are close cousins: both are bank deposits with a known return. The difference is that an RD is built from monthly instalments, so only the first instalment earns interest for the full period.

• Recurring deposit (RD): save a fixed amount every month at a fixed, guaranteed rate for a fixed tenure.
• Systematic investment plan (SIP): invest a fixed amount every month in a mutual fund; returns depend on the market.
• Fixed deposit (FD): put a lump sum away at a guaranteed rate, useful once you have already saved the money.

₹5,000 a month for 5 years

You put in ₹3,00,000 in total. In an RD at 7%, compounded quarterly as banks do, it grows to about ₹3,59,664. In an equity SIP, a 12% average return would give about ₹4,12,432, and a weaker 8% would give about ₹3,69,834. Over five years, a SIP has usually come out ahead, but not every five-year period has been kind to equity, and the value can be well below what you put in during a bad year.

Check other amounts and rates with the RD calculator and the SIP calculator.

₹5,000 a month for 2 years

Over shorter periods the gap shrinks and the risk grows. ₹1,20,000 saved over 24 months becomes about ₹1,29,099 in an RD at 7%. A SIP averaging 12% would reach about ₹1,36,216, but over two years equity can just as easily be down, which is a real problem if the money is for fees or a wedding on a fixed date.

For goals under about three years, the certainty of an RD is usually worth more than the possible extra return.

Where an FD fits

Once your RD matures, or if you already have a lump sum, an FD earns more than an RD at the same rate because the whole amount earns interest from day one. ₹3,00,000 in a 5-year FD at 7% grows to about ₹4,24,433, far more than the ₹3,59,664 from the same total saved monthly in an RD. The FD calculator shows the maturity value or monthly payout for any amount.

Tax

RD and FD interest is taxed every year at your slab rate, and banks deduct TDS above the yearly threshold. Equity fund gains are taxed only when you sell: at 12.5% on long-term gains above ₹1.25 lakh a year after holding for more than a year, and at 20% on short-term gains. For people in higher slabs, this difference adds to the SIP's advantage over long periods.

Breaking early

Life does not always follow the plan. Closing an RD or FD before maturity usually costs 0.5% to 1% of interest, but you never get back less than you deposited. A SIP can be stopped or redeemed at any time, often without a charge after the first year, but you receive whatever the units are worth that day, which may be less than you invested. Missing RD instalments also attracts a small penalty at most banks.

A simple rule of thumb

Figures assume constant returns for illustration. Mutual fund investments are subject to market risk, and deposit rates change over time.

• Money needed within 3 years: RD, or an FD if you have a lump sum.
• Money for goals 5 years or more away: SIP in a diversified equity or hybrid fund.
• In between: split between the two, or use a debt or hybrid fund.
• Keep an emergency fund of a few months' expenses in a savings account or FD before investing in a SIP.