SIP vs RD vs PPF: The Ultimate Showdown
When it comes to monthly savings, investors often get confused between Systematic Investment Plans (SIP), Recurring Deposits (RD), and Public Provident Fund (PPF). While all three encourage financial discipline, they serve very different purposes.
This detailed comparison breaks down the risk-adjusted returns, liquidity, and hidden nuances of each option to help you make the right choice.
1. Understanding the Contenders
Systematic Investment Plan (SIP)
SIP is a method of investing in Mutual Funds (usually Equity) every month. It is market-linked.
- Calculated Risk: High short-term volatility, but low long-term risk due to Rupee Cost Averaging.
- Potential: Highest growth potential (12-15% CAGR).
Recurring Deposit (RD)
RD is a bank product where you deposit a fixed amount monthly for a fixed tenure.
- Safety: High safety, guaranteed returns.
- Return: Low (6-7%). Often fails to beat inflation post-tax.
Public Provident Fund (PPF)
PPF is a government-backed long-term saving scheme.
- Safety: Sovereign guarantee (Safest).
- Tax Efficiency: EEE Status (Exempt-Exempt-Exempt). Tax-free returns.
2. Risk-Adjusted Returns Comparison
"Risk-Adjusted Return" measures how much return you get for the risk you take. Here lies the hidden debate:
The RD Trap: RDs offer "safe" returns, but they are inefficient. If an RD gives 7% and you are in the 30% tax bracket, your post-tax return is ~4.9%. If inflation is 6%, your real risk-adjusted return is negative (-1.1%). You are effectively losing purchasing power safely.
The PPF Shield: PPF currently offers 7.1% tax-free. Since there is zero tax, the real return is ~1.1% (7.1% - 6% inflation). Ideally suited for the debt component of your portfolio.
The SIP Growth Engine: Equity SIPs are volatile. However, over 10+ years, the risk drops significantly. A 12% return usually results in ~11% post-tax (LTCG). The real return is ~5% (11% - 6% inflation). SIPs offer 4x-5x higher real returns than PPF/RD over the long term.
3. Detailed Comparison Table
| Feature | SIP (Equity) | RD (Bank) | PPF |
|---|---|---|---|
| Returns (Avg) | 12% - 15% | 6% - 7.5% | 7.1% (Fixed) |
| Risk Profile | Moderate-High | Low | Zero (Risk-Free) |
| Taxation | LTCG 12.5% (>1.25L gain) | Taxable as per slab | 100% Tax Free |
| Liquidity | High (Anytime) | Medium (Penalty applied) | Low (15yr Lock-in) |
| Best Horizon | > 5 Years | 1 - 3 Years | > 15 Years |
4. How Does the Calculator Work?
This calculator computes the future value of your monthly investments across three different instruments, accounting for their unique compounding methods:
- SIP: Uses monthly compounding. Your expected return rate is divided by 12 to get the monthly rate, then compounded every month.
- RD: Uses quarterly compounding (as per bank standards). Interest is calculated and added every quarter.
- PPF: Uses annual compounding. Interest is calculated on the lowest balance between the 5th and end of each month, compounded yearly. Note: PPF has a ₹1.5 Lakh per year investment cap.
5. Mathematical Formulas Used
SIP Future Value Formula
M = P × ({[1 + i]^n – 1} / i) × (1 + i)
- M: Maturity Amount
- P: Monthly Investment
- n: Number of months (Years × 12)
- i: Monthly interest rate (Annual Rate / 12 / 100)
RD Maturity Formula
M = P × ({[1 + i]^n – 1} / i) × (1 + i)
Same formula as SIP, but banks typically use quarterly compounding internally. For simplicity, this calculator uses monthly compounding approximation which gives comparable results.
PPF Maturity Formula
Year-End Balance = (Previous Balance × R/100) + (Monthly Contribution × R/1200 × 78) + (Monthly × 12)
- R: PPF Interest Rate (currently 7.1%)
- 78: Sum of 1+2+3...+12 (accounts for monthly contribution timing within a year)
Note: If your monthly investment × 12 exceeds ₹1.5 Lakh, the PPF calculation is capped at ₹1.5L per year.
6. Verdict: Where Should You Invest?
- Choose RD if: You are saving for a short-term goal like a vacation or bike purchase in 1-2 years and cannot afford any risk.
- Choose PPF if: You want a safe retirement corpus or need to save tax under Section 80C, and you are okay with locking money for 15 years.
- Choose SIP if: You want to create wealth, beat inflation, and save for long-term goals like buying a house or early retirement.
💡 Wealth Hack: A popular strategy is the "Core & Satellite" approach. Use PPF to build a safe base (Core) and use SIPs to generate alpha/growth (Satellite). This balances safety with high returns.
Frequently Asked Questions (FAQs)
Which is better: SIP, RD, or PPF?
It depends on time horizon. For < 3 years: RD. For> 15 years (Safety): PPF. For > 5 years (Growth): SIP. SIPs generally offer the highest wealth creation potential.
Is SIP riskier than PPF?
Yes, SIPs carry market risk. However, the risk diminishes over time. In the last 20 years, no 10-year SIP in a diversified index fund has yielded negative returns.
Can I invest in all three?
Yes. Many savvy investors maximize their PPF (₹1.5L/year) for safety and tax saving, use RDs for short-term recurring expenses, and put the surplus into equity SIPs for wealth generation.
Does PPF beat inflation?
Historically, PPF rates (around 7-8%) have barely stayed above inflation (5-7%). While it preserves capital, it does not aggressively grow purchasing power like equity SIPs do.
What is the hidden downside of RD?
The biggest downside is taxation. RD interest is fully taxable as per your income slab. If you are in the 30% tax bracket, a 7% RD effectively yields only ~4.9% after tax. With inflation at 6%, your real return becomes negative (-1.1%). You are essentially losing purchasing power while feeling "safe."