Started working??Still planning for savings??If you ask your parents about where to invest, they would probably recommend Recurring Deposits (RD) of banks. Before you go with that option there are many alternatives which are available and offer potentially higher returns. One such alternative is the SIP which is offered by mutual fund houses. The product works same as Recurring Deposit of bank, difference being SIP’s invest in capital markets which include equity and debt instruments.
Which is better for you? SIP or and RD? This depends on your time horizon for your Financial Goals, risk appetite and tax treatment
Mutual funds have delivered more than 15% compounded annual returns over a 7-10 years time horizon. However an RD would fetch you returns between 6-7% annually. In the current economic scenario, along with the impact of demonetization, interest rates are expected to decrease. If interest rates decrease the yields of an RD will decrease as well. So it is better to invest in an investment avenue which would fetch you more than the inflation.
Systematic Investment Plan is Tax efficient when compared to RD. In the case of Recurring Deposit, the income that is earned as an Interest is added to your total income and is taxed as per your tax slab. In the case Equity Mutual Funds there is not long term capital gains tax if you withdraw after 1 year.
With the small chunk of saving every month you can diversify into different asset classes in mutual funds. Consider an investor with a surplus of 10,000 every month which he needs to allocate for his retirement and kids’ education goal. Instead of relying on one asset class he can diversify his investments in equity, debt and commodities which would yield higher returns with reduced risk.
In case of RD you have an exit load of 1% when you cancel or redeem the investments prior to the maturity date. With SIP in Mutual Funds you have the flexibility of cancelling the SIP for the future dates, you will not be charged unless you redeem the funds. The charges depend on the asset classes of the funds which you are investing. In equity funds, you have exit loads of 1% before 1year, the load structures of debt / liquid fund varies depending on the time horizon of the fund class which you are investing. In case of liquid funds there is no exit load, in case of short, mid and long term debt fund exit loads are levied only if redemption is made within 1 year of the investment.
Before taking any decision, talk to a Certified Financial Advisor and plan accordingly.