An SIP or an RD of ₹2,000: Which one will yield ₹70 lakh after 30 years? Understand the calculation..
You do not need a large sum of money to start investing. Even if you can save just ₹2,000 every month, you can build a substantial fund over the long term. However, deciding where to invest is crucial. Two popular investment options are SIP (Systematic Investment Plan) and RD (Recurring Deposit). Both require a fixed monthly contribution, but they differ in terms of potential returns and risk.
Through an SIP, you invest in mutual funds, where returns depend on the performance of the stock market. In contrast, an RD involves depositing a fixed amount every month into a bank or post office account, which earns a predetermined rate of interest. This raises a question: if you invest ₹2,000 every month, which option will yield a larger corpus after 10, 20, or 30 years? Let’s find out through a simple calculation.
How much of a fund can be built by investing ₹2,000 via an SIP?
Returns from an SIP are not guaranteed; they depend on the specific mutual fund you choose and the performance of the market. For the purpose of this calculation, an average annual return of 12% has been assumed.
If you start an SIP of ₹2,000 per month, your total investment over 10 years would amount to ₹2.40 lakh. If you continue this investment for 30 years, your total contribution would be ₹7.20 lakh; however, thanks to the power of compounding, this amount could grow to approximately ₹70 lakh.
SIP Calculation
Investment Tenure Total Investment Estimated Fund Estimated Profit
10 years ₹2.40 lakh ₹4.60 lakh ₹2.20 lakh
15 years ₹3.60 lakh ₹9.99 lakh ₹6.39 lakh
20 years ₹4.80 lakh ₹19.79 lakh ₹14.99 lakh
25 years ₹6 lakh ₹37.58 lakh ₹31.58 lakh
30 years ₹7.20 lakh ₹69.90 lakh ₹62.70 lakh
What happens if you deposit ₹2,000 every month in an RD (Recurring Deposit)?
If you wish to avoid the risks associated with the stock market, an RD can be a suitable option. It involves depositing a fixed amount every month, which earns interest at a rate determined by the bank or post office. Interest rates may vary depending on the institution and the tenure. For this calculation, an annual interest rate of 7% has been assumed.
RD Calculation
Investment Tenure Total Investment Estimated Fund Estimated Interest
10 years ₹2.40 lakh ₹3.45 lakh ₹1.05 lakh
15 years ₹3.60 lakh ₹6.32 lakh ₹2.72 lakh
20 years ₹4.80 lakh ₹10.37 lakh ₹5.57 lakh
25 years ₹6 lakh ₹16.10 lakh ₹10.10 lakh
30 years ₹7.20 lakh ₹24.21 lakh ₹17.01 lakh
Please note that this long-term RD calculation assumes that the investor will continue to receive an interest rate of approximately 7% throughout the entire tenure. In reality, RD tenures and interest rates may vary according to the bank's policies. For longer durations, you might need to reinvest the funds upon maturity.
What is the difference between an SIP and an RD over 30 years? Comparing the two calculations, an SIP could potentially grow to approximately ₹69.90 lakh over 30 years, whereas an RD would amount to about ₹24.21 lakh—a difference of roughly ₹45.69 lakh. This significant gap is primarily due to the effects of compounding and the difference in the assumed rates of return for each option. It is important to note, however, that there is no guarantee of a 12% return with an SIP; the value of your investment could decline during a market downturn. Conversely, while the interest rate on an RD is fixed, it may vary for new investments or upon renewal.
Which is better for you: an SIP or an RD?
If you are investing for the long term and can tolerate market volatility, an SIP offers the potential to build a substantial corpus. On the other hand, if your primary priority is capital protection and a guaranteed interest rate, an RD may be a more suitable choice. Alternatively, you could also consider a combination of both.
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