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RETAIL RESEARCH

PERSONAL FINANCE

28 JULY 2016

SIP Vs. RD
Systematic Investment Plan in Hybrid - Equity oriented funds Vs. Recurring Deposit:
Prologue:
Having burnt their fingers in trying out direct equities without proper study/advice, many investors go on to extreme safe mode.
They then stick to the traditional investment products such as RDs and FDs and are not able to earn higher returns which is
available with other investment products.
Though the traditional investment products such as FDs and RDs are safer than equities as they are not market linked, they
provide a relatively lower returns and lower tax efficiency.
What is RD?
Recurring Deposit (RD) is a type of term deposits offered by banks and post offices where the investor makes regular and fixed
investments every month and earns a rate of return which is similar to those offered by Bank FDs, for a specified period of time.
The interest earned on RDs is taxed as per ones income tax slab on accrual basis.
RD is a traditional systematic investment plan wherein the money invested by the investors are used by the banks for their
business activities. The banks, in return, pay the interest to the investors at the prevailing interest rate in the economy.
What is an SIP?
On the other hand, an SIP is a popular way to invest in mutual funds especially in equity and Hybrid mutual funds that allows an
investor to invest small amounts of money regularly. By investing in an equity mutual fund through SIP mode, the impact of
market volatility gets minimized due to rupee cost average, helping the investor to get relatively higher returns.
Though it is not fair to compare the two as they belong to different asset classes, namely equity and debt, the comparison is
inevitable as the SIP investment generates higher returns and helps the investors to reach their financial goals.
Taxation:
Here, SIP investment in Equity and Hybrid equity oriented schemes scores over RD in terms of taxation is concerned. The
interest earned on RDs is usually taxed as per ones income tax slab on accrual basis every year. But in Equity and Hybrid equity
oriented schemes, investors can qualify for Long Term Capital Gain Tax benefit if he sells the units after one year from the date of
purchase that is totally tax free. If he sells, within one year period, he has to pay Short Term Capital Gain tax at the rate of 15%.
Hence, SIP in Equity and Hybrid equity oriented schemes works well for both the long-term as well as short-term gains.
SIP helps to achieve the long term financial goals:
If one is looking to build a retirement corpus or a large fund for childrens education or marriage, then it would be better to opt
for SIPs in some good Hybrid mutual funds, which entail slightly lesser risk than SIP in equity mutual funds.
The below table shows the SIP performance of some of the Hybrid Equity oriented schemes for the 3 and 5 years time frames.

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SIP performance of Hybrid Equity oriented Mutual fund & Nifty ETF schemes:
SIP Returns (XIRR) (%)

Name of Fund
SIP Started date
No of instalment
Returns:
HDFC Balanced Fund(G)
Tata Balanced Fund(G)
L&T India Prudence Fund-Reg(G)
GS Nifty BeES
Benchmark:
NIFTY 50

3 Year
01/Aug/2013
36

5 Year
01/Aug/2011
60

18.59
18.34
18.54
11.06

18.70
19.08
19.19
12.62

9.86

11.43

Note: SIP value as on July 27, 2016.

The below table shows the Recurring Deposit Interest Rates of some of Public and Private sector banks:
Recurring Deposit Interest Rates of some of Public and Private sector banks:
Name of banks

3 Year

SBI

5 Year

7%

7%

Post office

7.40%

7.40%

HDFC Bank

7.50%

7.50%

ICICI Bank

7.50%

7.50%

Comparing the both tables, it is clearly seen that SIP investment in mutual funds (Equity/Hybrid funds) has generated higher
returns than the RD interest rates offered by the banks and post office. The post tax difference in the returns will be even higher.
SIP Vs. RD:
Particulars
Investment
Frequency of
instalment
Returns

Return generation

compounding
effect

Risk

Liquidity

Taxation

TDS/STT
provisions

SIP in Hybrid equity oriented schemes

RD

Investment through SIP can be made in any of equity oriented and

Hybrid mutual funds.
Investors can do SIP with the frequency of daily, weekly or
monthly, quarterly, half yearly etc. as per the choice of Investor.
The returns obtained are dependent on the equity or debt market
as per scheme chosen by the investor. Over long run, better
performing mutual funds give double digit returns

In Recurring deposit, one has only one choice of the scheme, and
that is to invest in deposit with fixed rate of return.

Units that are accumulated on every SIP installments generate the

same returns
Compounding returns means the income generated by the
principal also generates income. In MF, income is clubbed with the
principal amount daily hence compounding effect happens every
day.
Returns in SIP are variable and there can be a risk of returns and
capital as per markets. However, historically SIPs give higher
returns in long term
SIP offers better liquidity than RD. SIP can be closed and money
can be withdrawn without any penal charges. (however exit load is
applicable during initial period)
In equity and Hybrid equity oriented schemes, investor can
qualify for Long Term Capital Gain Tax benefit if he sells the units
after one year from the date of purchase that is totally tax free. If
he sells, within one year period, he has to pay Short Term Capital
Gain tax at the rate of 15%.
No TDS is applicable, however STT is deductible at the time of
redemption @0.001%

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Mostly monthly
Rate of return is fixed in RD and is known at the time of the start of
RD account and is normally in single digit.
In a RD, only the 1st deposit earns interest for 12 months. The 2nd
deposit earns interest for 11 months, the 3rd for 10 months and so
on. The compounding effect is minimal in RD returns.
Mostly quarterly. (However, based on the banks' decision).

RD is very safe investment and the risk is almost nil as money is

deposited into a bank.
RD is liquid; however, premature withdrawal charges will be
applicable.
The interest earned on RDs is usually taxed as per ones income tax
slab on accrual basis every year. If the investor comes under
highest tax bracket, then he has to pay tax at 30% + surcharge and
cess.
TDS is calculated and deducted every financial year if interest
earned from a bank id more than Rs. 10,000p.a.

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Analyst: Dhuraivel Gunasekaran (Dhuraivel.gunasekaran@hdfcsec.com)

RETAIL RESEARCH Tel: (022) 3075 3400 Fax: (022) 2496 5066 Corporate Office.
HDFC securities Limited, I Think Techno Campus, Building - B, "Alpha", Office Floor 8, Near Kanjurmarg Station, Opp. Crompton Greaves, Kanjurmarg (East), Mumbai 400 042 Phone: (022) 3075 3400 Fax: (022)
2496 5066 Website: www.hdfcsec.com Email: hdfcsecretailresearch@hdfcsec.com. HDFC Securities Ltd. is a SEBI Registered Research Analyst having registration no. INH000002475."
Disclaimer: Mutual Funds investments are subject to risk. Past performance is no guarantee for future performance. This document has been prepared by HDFC Securities Limited and is meant for sole use by the
recipient and not for circulation. This document is not to be reported or copied or made available to others. It should not be considered to be taken as an offer to sell or a solicitation to buy any security. The information
contained herein is from sources believed reliable. We do not represent that it is accurate or complete and it should not be relied upon as such. We may have from time to time positions or options on, and buy and sell
securities referred to herein. We may from time to time solicit from, or perform investment banking, or other services for, any company mentioned in this document. This report is intended for non-Institutional Clients.
This report has been prepared by the Retail Research team of HDFC Securities Ltd. The views, opinions, estimates, ratings, target price, entry prices and/or other parameters mentioned in this document may or may
not match or may be contrary with those of the other Research teams (Institutional, PCG) of HDFC Securities Ltd.

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