Investing

Recurring deposit vs SIP: what the numbers actually say

Both take a fixed amount out of your account every month. That shared habit is why they get compared — and it hides the fact that one of them tells you the answer in advance and the other cannot. Here are both formulas, worked side by side on the same money.

Two machines, one habit

A recurring deposit is a contract with a bank. You commit to a monthly instalment for a fixed tenure at a rate agreed on day one, and the bank owes you a specific amount at the end. The rate does not move once booked.

A SIP — a systematic investment plan — is an instruction to buy units of a mutual fund with a fixed rupee amount on a fixed date each month. Nobody promises what those units will be worth later. The monthly discipline is the same; the certainty is not remotely the same.

That distinction is the whole article. Everything below is an attempt to put a number on it.

The two formulas

The structures are cousins — both are future-value-of-an-annuity calculations. The difference in the output comes almost entirely from what you feed into i, and from whether that number is a promise or a guess.

A worked example, step by step

₹5,000 a month for 5 years (60 months) in each. The RD uses an illustrative 6.5% p.a.; the SIP uses the customary 12% p.a. illustration. Neither is a market rate or a forecast — both are round numbers chosen to make the arithmetic visible. Check your bank for actual deposit rates.

The RD side:

1. Quarterly rate: 6.5 ÷ 4 = 1.625%, or i = 0.01625.
2. Quarters: 60 months ÷ 3 = 20.
3. Growth factor: (1.01625)²⁰ = 1.380420, so the numerator is 1.380420 − 1 = 0.380420.
4. The monthly-instalment adjustment: (1.01625)^−1/3 = 0.994641, so the denominator is 1 − 0.994641 = 0.005359.
5. Divide: 0.380420 ÷ 0.005359 = 70.99082.
6. Multiply by the instalment: ₹5,000 × 70.99082 = ₹3,54,954.

Total deposited ₹3,00,000; interest earned ₹54,954.

The SIP side:

1. Monthly rate: 12 ÷ 12 = 1%, or i = 0.01.
2. Growth factor: (1.01)⁶⁰ = 1.816697.
3. Annuity factor: (1.816697 − 1) ÷ 0.01 = 81.6697.
4. Adjust for each instalment earning from the start of its month: × 1.01 = 82.4864.
5. Multiply: ₹5,000 × 82.4864 = ₹4,12,432.

Total invested ₹3,00,000; projected growth ₹1,12,432.

The gap is ₹57,478 on the same ₹3,00,000 of contributions. That is the number usually quoted as the case for a SIP. It is also the number most often misread.

Almost the entire gap is one assumption

Run the SIP formula again at 6.5% — the same rate as the RD — and it produces ₹3,55,284. The RD produced ₹3,54,954. The two mechanisms differ by about ₹330 over five years, roughly a tenth of a percent, arising only from monthly versus quarterly compounding.

So the SIP does not have a structurally better machine. It has a bigger number plugged into it — and that bigger number is an assumption, not a rate anyone owes you. The 6.5% side is contractual; the 12% side is an illustration. Comparing ₹3,54,954 against ₹4,12,432 as though both were equally solid is the single most common mistake in this comparison.

What the gap does over longer horizons

Same ₹5,000 a month, RD at 6.5%, SIP at an assumed 12%:

The gap does not grow steadily — it explodes, because the two rates compound against each other. Over 3 years the difference is about 10% of what you contributed. Over 15 years it exceeds the entire amount contributed. This is why horizon, more than anything else, decides which product fits: the case for accepting uncertainty gets stronger the longer you can leave the money alone, and it is weakest exactly when you need the money soon.

The price of the projection

The 12% assumption is doing all the work above, so it is worth seeing what happens when it does not hold. Same ₹5,000 a month for 5 years, varying only the realised return:

Every one of those outcomes is possible for a market-linked investment over five years, and a genuinely negative period is possible too — the table stops at 0% for readability, not because it is a floor. The RD's ₹3,54,954, by contrast, has one outcome. Note where 8% lands: ₹3,69,834, only about ₹15,000 ahead of the RD, for five years of accepting fluctuation. Working backwards the other way, an RD would need a rate of roughly 12.12% to match a SIP that actually delivers 12% — slightly more than 12% because quarterly compounding lags monthly compounding.

Beyond the maturity figure

• Tax timing differs. RD interest is taxed as income at your slab rate and accrues year by year, with TDS once your interest crosses the prevailing threshold. Mutual fund gains are generally taxed as capital gains, and only when you redeem. That timing difference alone means a pre-tax comparison is incomplete.
• Missing a payment differs. Skip an RD instalment and most banks levy a penalty; repeated defaults can close the deposit on the bank's terms. Skip a SIP instalment and you have simply bought nothing that month.
• Exiting differs. Breaking an RD usually means a reduced interest rate as a penalty, but the amount is still positive and predictable. Exiting a SIP means selling units at whatever price applies that day, which may be below what you paid.
• Rupee-cost averaging is not a safety net. Buying monthly smooths your average purchase price against a single-day lump sum entry. It does nothing for the value of units you already hold.

Common questions

Is a SIP just a mutual fund version of an RD?

The habit is identical — a fixed amount debited every month — and that is why the two get compared. The instrument is not. An RD is a deposit contract with a bank at a rate fixed in advance, so the maturity amount is knowable on day one. A SIP buys units of a mutual fund at whatever price applies on each instalment date, so the final value is not knowable in advance at all. Same discipline, completely different certainty.

Why does an RD earn less than an FD at the same rate?

Because the money arrives late. In an FD the whole amount is deposited on day one and compounds for the full tenure. In an RD only the first instalment gets the full tenure — the last instalment earns interest for a single month. The average rupee in an RD is invested for roughly half the tenure, so the same rate produces materially less interest on the same total amount.

If a SIP has historically returned more, why would anyone choose an RD?

Because an RD's return is contractual and a SIP's is not. For money you will definitely need on a specific date — a fee payment, a deposit, an emergency buffer — a knowable amount matters more than an expected one. A SIP that is down on the month you need the money has no obligation to recover on your schedule. Horizon, not expected return, is usually the deciding factor.

Does rupee-cost averaging make a SIP safe?

No. Investing a fixed amount monthly does buy more units when prices are low and fewer when they are high, which smooths your average purchase price compared with investing one lump sum at a single price. It does nothing about the value of the units you already hold. A SIP can still be worth less than the total you put in, particularly over short horizons — averaging spreads entry risk, it does not remove market risk.

How are RD and SIP returns taxed differently?

The mechanisms differ in a way that matters. RD interest is taxable as income at your slab rate and accrues year by year, with TDS deducted once your interest crosses the prevailing threshold in a financial year. Mutual fund gains are generally taxed as capital gains and only when you redeem, with the treatment depending on the fund type and how long you held the units. Rates, thresholds and holding-period rules change with tax law, so confirm the current position rather than assuming — but the timing difference alone means a pre-tax comparison of the two is incomplete.

Can I do both?

Splitting a monthly saving across both is common, and it is a decision about which goal each rupee belongs to rather than a compromise. Money needed within a short and specific window generally suits the deposit side, where the amount is contractual. Money with a long horizon and no fixed date can tolerate the fluctuation that comes with a market-linked product. The split follows your goals and your own risk tolerance, and a decision specific to you is worth discussing with a SEBI-registered investment adviser.

Educational information only, not financial advice. Found an error? Tell us and we will correct it with a dated note.