Which One is Better: Recurring Deposit in Bank or SIP in Mutual Funds?

Savings and Investment are two separate concepts. Savings are generally short term in nature and may be intended for a specific purpose like education of child, marriage of a girl child, including savings for investment. Investment on the other hand is long term in nature, say for 20 to 30 years and should not be broken or sold or withdrawn before that period.

A recurring deposit (RD) with a bank for savings purpose is alright. If one is talking about investing and multiplying the sum many times then systematic investment plan (SIP) is the only answer and there is no comparison with RD.

Even though you have not touched this aspect, I have repeatedly mention every time, everywhere that starting a SIP and discontinuing it after a short time, citing reasons of market conditions, is quite useless. A SIP can yield benefits only if it is kept alive irrespective of any reasons for 20 to thirty or even 50 years. During that long, long period the ‘Miracle of Compounding’, propounded by Albert Einstein, will work in favour of the investor. Also the companies constituting the mutual fund grow naturally in size and profits, again benefiting the investor.

Believe me, following the simple principle described herein can not only multiply the investment many times but make the investor really Rich.

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Anand

Note: This is a reproduction of the question I had answered on the website ‘Quora’.

I would like to buy a stock or bond for my newborn grandchild. What would you recommend?

Dear Sir/ Madam, you are on the right track, while thinking on financial instruments as a gift for your newborn grandchild, instead of thinking gold or such non-income earning avenues.

Between bonds and equity, the later is better, especially considering that the child is just born and has a very, very long and bright future ahead for the initial investment to multiply, on the back of the ‘Miracle of Compounding’, espoused by Albert Einstein.

A bond, though appears to be relatively safe, has its own woes. It will yield a fixed regular income but no capital appreciation. On the contrary equity offers both regular income in the form of dividends as well as capital appreciation. If you think equity investments are complex, you may invest the money in an Exchange Traded Fund (ETF) like Goldman Sachs’ NIFTY BEES, or any mutual fund.

The key to investing, however, is to simply forget about it. By the time child grows up to the 40s, he or she already would have achieved ‘Total Financial Freedom’. Just imagine what a wonderful thing financial freedom is - one does not have to work - one may work in areas of passion, purely for the joy, rather than the drudgery of making a living!

Note: This is a reproduction of the question I had answered on the website ‘Quora’.