While planning a future for your child, parents often look for certain financial options such as growth, balance, safety, long-term stability, etc. Being a parent, you may come across two different securities, namely SIPs & recurring deposits. On one hand, SIPs are market-linked investment plans, recurring deposits on the other hand offer guaranteed returns with low risk. Choosing the Best Child Investment Plan for your child, which will help them achieve their financial objectives, requires a parent to understand the difference between the two plans.
What is SIP?
SIP stands for Systematic Investment Plan, which includes investment in mutual funds with the help of the contribution of a pre-determined amount of money at pre-determined regular intervals of time. This plan helps maintain a healthy savings plan & restricts the complexities of tracking market-related fluctuations. It is best suited for salaried & first-time investors who want to make small investments which will grow with a compounding factor.
What is RD?
Amongst many short-term investment plans, a recurring deposit is a low-risk investment option offering assured returns. Recurring deposits are one of the Best Saving Schemes that offer flexibility in choosing the amount & the tenure of investment. It can be availed in a flexible tenure ranging from 6 months to 10 years, letting you create a short or long-term corpus. The minimum amount to start with the deposit is as low as INR 100 per month, according to your budget.
Difference between SIP & Recurring Deposit
Provided are the differences between SIP & recurring deposits:
| Basis of Difference | SIP | Recurring Deposit |
| Nature of Investment | It involves periodic contributions of a fixed amount to mutual funds. | It involves a fixed amount to be contributed every month with pre-fixed returns. |
| Risk Factor | As they are market-linked, hence exposed to risks. | As they are not market-linked, hence are risk-free. |
| Returns | As they are market-linked, hence high returns. | They offer fixed returns at a pre-determined interest rate. |
| Flexibility | The amount & frequency of investment can be changed depending on your objectives. | These cannot be changed as they involve a fixed deposit amount. |
| Tenure | There is no fixed tenure. | It has a fixed tenure ranging from 6 months to 10 years. |
| Liquidity | As they allow withdrawal of funds at any point in time, hence are highly liquid. | They are less liquid, as withdrawals attract lower interest & a penalty. |
| Purpose | They are best suited for long-term financial goals. | They are best suited for short-term financial goals. |
| Investment Frequency | Weekly, quarterly or monthly | Fixed monthly deposit |
| Scheme | It invests in debt, equity, or hybrid, etc., depending on the choice of investor. | Banks offer fixed rates & tenures. |
| Penalty | No penalty is charged for early withdrawals. | Penalty is charged for early withdrawals. |
| Where does it invest? | The funds are invested in debt, stock, or hybrid funds. | Funds are deposited in fixed deposits or government bonds, ensuring assured returns. |
Features of SIP
Provided are the features of a Systematic Investment Plan (SIP):
- Rupee Cost Averaging
The Rupee cost averaging followed in SIP helps investors to mitigate the risk of market fluctuations. This means that during downtime, investors buy more units & vice versa to enjoy the benefits of market fluctuations.
- Disciplined Investment
Regular contributions of money towards SIP build a disciplined approach, which further leads to regular savings, consistent investments, & wealth creation.
- Flexibility
This plan allows investors the flexibility to choose the amount to be invested, which makes this plan suitable for every income class with different financial standards.
- Professional Fund Management
Under this plan, the professional fund managers help in decision-making depending on the investor’s financial objectives & market fluctuations.
- Long-Term Wealth Creation
SIP allows investors to plan investments to achieve long-term wealth creation with consistency, discipline & compounding power.
- Suspending Investment Options
At times of financial uncertainties, SIPs allow investors to pause their investments, i.e. suspend them for the time being, which will resume automatically after the pause tenure is completed.
- Unrestricted Investment Ceilings
It allows you to invest any amount starting from as low as INR 100 with no upper limit.
Features of Recurring Deposit
Provided are the salient features of a recurring deposit:
- Tenure
The recurring deposit tenure can range between 6 months & 10 years, hence offering flexibility.
- Minimum Deposit Amount
The minimum amount required to open an RD varies from bank to bank, i.e. it can be as low as INR 100.
- Withdrawal Restrictions
The restrictions on withdrawal vary from bank to bank. Hence, some banks do not allow a premature withdrawal of funds, & on the contrary, some banks allow it but at an added penalty cost.
- St&ing Instructions
Provide st&ing instructions to your respective savings account for an automatic transfer deduction on a pre-specified date every month.
- Loan Facility
It also allows individuals to avail of loan facilities against recurring deposits, which can range up to 80-90% of the value of the deposit.
- Competitive Interest Rates
Recurring deposits offer a competitive rate of interest, i.e. they offer returns more than that of regular savings accounts.
SIPs or RDs – Which to Choose?
RDs should be chosen in case of the following cases:
- In case you are looking for assured & risk-free returns.
- In case you want short-term savings which has a fixed maturity date.
- In case you are looking for guaranteed & stable interest rates.
- In case you want to inculcate discipline in your savings.
SIPs should be chosen in case of the following cases:
- In case only investments are required & not insurance.
- In case you need a high level of liquidity & want to get units redeemed at any point in time.
- If you want high returns & low charges.
- If you are comfortable with market-linked investment plans.
Conclusion
Both SIP & recurring deposits have their own pros & cons, where the decision of choosing will depend on the investment horizon, risk tolerance level, financial objectives, etc. Whichever plan you choose, whether stability with RD or growth with SIP, the crux is to start investing early & on a consistent basis.
