For investors looking for long-term wealth creation, Systematic Investment Plans (SIPs) in mutual funds and Recurring Deposits (RDs) in post offices offer two different approaches.
While a SIP involves investing a fixed amount regularly in market-linked mutual funds, a post office RD allows depositing a fixed sum every month at a guaranteed interest rate. Both investing techniques have some common features, but they still vary vastly in other aspects.
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SIPs have the potential to deliver higher long-term returns but are subject to market fluctuations. In contrast, RDs provide stable and predictable returns and are backed by the government.
While simple calculations show SIPs as a smarter choice for long term, it may not be ideal for everyone due to the risk profile. Choosing them depends on an investor's risk appetite, financial goals and overall investment duration.
Here's How The Two Investments Differ In Math:
Rs 25,000 SIP v RD In 5 Years:
A monthly SIP of Rs 25,000 for five years at an expected annual return of 12% would require a total investment of Rs 15 lakh. In this case, the estimated gains after 5 years are likely to be Rs 5.62 lakh, taking the total corpus to around Rs 20.62 lakh at maturity.
In contrast, a similar investment into RD in a post office at the current 6.7% returns would yield a total corpus value of Rs 17.85 lakh.
In the first 5 years, the difference between SIP and RD does not seem too big. However, as more years pass, the higher compounding potential of SIPs begins to reflect on the corpus.
Rs 25,000 SIP v RD In 10 Years
Rs 25,000 per month SIP for 10 years requires total investment of Rs 30 lakh. Here, at 12% annual returns, the returns turn out to be Rs 28.08 lakh, while the total corpus is Rs 58.08 lakh.
In contrast, a post office RD for 10 years at 6.7% would give around Rs 12.80 lakh returns on Rs 30 lakh investment. This takes the total corpus to Rs 42.80 lakh At 10 years. The difference between the two investment strategies begins to show due to mutual funds benefiting from higher power of compounding.
Difference = The investor may be able to build another Rs 15 lakh corpus value if they opt for SIPs over RDs in post office for a 10 year tenure.
Rs 25,000 SIP v RD In 20 Years
Monthly RD = Rs 25,000
Investment duration: 20 years
Expected rate of return: 6.7%
Invested amount: Rs 60,00,000
Estimated returns: Rs 66,29,090
Total value: Rs 1,26,29,090
Monthly SIP = Rs 25,000
Investment duration: 20 years
Expected rate of return: 12%
Invested amount: Rs 60,00,000
Estimated returns: Rs 1,89,78,697
Total value: Rs 2,49,78,697
Over a 20-year period, a post office RD can potentially double the invested amount through steady, guaranteed returns. In comparison, SIPs in equity mutual funds have the potential to grow the investment nearly four times.
These calculations across time periods show that SIPs may be able to reward investors significantly higher in longer duration. However, choosing the asset depends on various factors such as risk tolerance, investment horizon, income sources, etc.
If the investor has a conservative appetite and wishes to stay invested for around 5 years, they may choose RDs as the difference is not too big compared to SIPs. However, for longer durations, they may consider mutual funds based on their financial goals and risk appetite.
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