Mutual Fund SIP or Bank RD - Which is better? 

6 MinsDec 07, 2022

To build a sizeable wealth, you need to save and invest regularly. Even if you start small, follow the necessary discipline and keep adding to your investments regularly. This could help you build the required corpus for your financial goals. And the earlier you start investing, the larger would be the corpus you’ll be able to build.

Mutual Fund SIP or Bank RD - Which is better?

While there are several options to save and invest regularly and systematically, Mutual Fund SIPs (Systematic Investment Plans) and Bank RDs (Recurring Deposits) allow you the flexibility to choose the tenure as per your liquidity needs.

Which is Better - Mutual Fund SIP or a Bank RD?

Mutual fund SIP v/s Bank RD

ParametersMutual Fund SIPBank Recurring Deposits
ReturnsMarket-linkedFixed and secured
RiskLow-Medium-to-High Risk (depends on the type of scheme)Low-Risk #
Premature WithdrawalPermitted subject to Exit LoadPermitted subject to a penalty
Cost of InvestingExpense RatioNo Cost
Tax implicationsCapital gains and Dividends are taxableInterest is taxable

#A Bank FD is currently insured under the DICGC up to a sum of Rs 5 lakh (including the principal amount + interest) per depositor (aggregating deposits for all branches of a respective bank).

For illustrative purposes only.

Mutual Fund SIPs

SIPs are a mode of investing in mutual funds, wherein you can invest a certain sum of money systematically at regular intervals, which could be daily, weekly, monthly, quarterly, etc.

Your investments are made on the chosen SIP date and the money gets invested in the respective mutual fund scheme/s systematically.

In the case of monthly SIPs, most mutual fund houses allow SIP instalment amounts of as little as Rs. 100 to Rs. 500. Ideally, your SIP amount should be set in such a way that it shall help you achieve the envisioned financial goal.

Now in case you want to achieve the goal sooner or comfortably, consider increasing the SIP amount by a certain percentage gradually, say annually.

How much should you increase your SIP amount?
Well, there is no magic number. You need to decide considering your regular monthly expenses, including the EMIs on your outstanding loans, financial goals, plus your contingency reserve.

For regular investment and discipline make pay-day your SIP day. In case you miss your SIP instalment for some reason, do not panic. The fund house will not penalise you for missing the SIP instalment but instead, may try again. Still, if the SIP instalment is not triggered, then the amount invested so far (via SIP) will continue to clock returns, the folio will continue to exist, and the next SIP instalment will continue to be scheduled on respective dates during the remaining SIP tenure. However, if you miss your SIP instalments for three consecutive months, then the fund house may cancel your SIP mandate.

It is important to ensure that the mutual fund schemes you are investing in are among the best and are the most suitable for you. Ideally, the selection should be done considering your risk profile, investment objectives, financial goal/s, and the time horizon to achieve the goal/s. Construct your SIP portfolio in such a way that it works under all market conditions.

To start a SIP in a mutual fund best suited for you, click here. You can also use Axis Bank's SIP calculator.

The capital gains you make on the SIPs will be subject to Short-Term Capital Gain or Long-Term Capital Gain Tax, as the case may be. Further, if you have chosen the Dividend option, the dividends earned would be taxable in your, i.e. the unitholder’s hand, as per your income-tax slab.

[Also Read: Know How Much it Costs to Invest in Mutual Funds]

Bank Recurring Deposit (RD)

In contrast to MF SIP, a Bank RD is a form of term deposit that facilitates you to build your savings and investments through systematic deposits, every month. A bank RD earns you fixed and secured returns without being subject to market-linked risk.

A bank RD can be opened with a minimum monthly instalment of Rs. 500, while the maximum can run in multiples thereof, with no maximum limit. You have the flexibility to choose your RD tenure anywhere from 6 months to 10 years depending on your liquidity needs.

Here are things you should follow when investing in a bank RD:

  • Open an RD account when the interest rates are high.
  • Make sure the monthly deposit sum is meaningful so that it helps achieve the envisioned financial goal/s.
  • Invest regularly and do not delay depositing your instalment sum (be disciplined).

Ideally, you should not delay depositing your instalment sum. Doing so results in losing out on the interest and you footing a penalty. Also, do not stop investing in the RD account and prematurely close it, as this shall preclude you from making the most of your RD. At the end of the maturity period if you do not need the money immediately, make a fixed deposit for an appropriate tenure.

Axis Bank’s Recurring Deposit interest rate (compounded quarterly) gives you the advantage of earning a higher rate of return on your systematic monthly deposits and gain with the benefit of compounding. Open an RD account today! From a diversification point of view, it is important to have some money parked in a term deposit even though you may be a risk taker.

Want to know the quantum of interest you can earn over the tenure of the RD and the maturity proceeds, use Axis Bank’s Recurring Deposit calculator.

Keep in mind that the interest earned on the bank RD is taxable under the Income Tax Act, 1961. The interest earned on RDs is taxed as per one’s income tax slab on an accrual basis. However, the bank first deducts tax at source (TDS). In the case of non-senior citizens, if the interest income exceeds Rs. 40,000 in a financial year, the bank first deducts tax at the source. For senior citizens, this threshold limit is Rs. 50,000. The rate of TDS is 10% if PAN is furnished, and if not, then 20%. No surcharge or cess is levied over and above this basic rate.

However, to avoid TDS, you may furnish a declaration under Section 197A of the Income Tax Act in Form 15-G (for general or non-senior citizens) or Form 15-H (for senior citizens), as applicable, to the bank.

Whichever avenue you choose to make regular and systematic investments, follow a sensible approach for it to be a rewarding experience. Adopt financial discipline in the interest of your well-being.

Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision

Mutual Fund investments are subject to market risk, read all scheme related documents carefully. Axis Bank Ltd is acting as an AMFI registered MF Distributor (ARN code: ARN-0019). Purchase of Mutual Funds by Axis Bank’s customer is purely voluntary and not linked to availment of any other facility from the Bank. *T&C apply