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I am investing ₹1,500 towards SIP in HDFC Mid-Cap Opportunities Fund with the growth option from this August for three years. I want to know the prospects of this fund. Will it yield good returns? Or is it better to go for a recurring deposit for the same amount? What is the difference between investing in an RD and systematic investment plan?

R Akhil Ratheesh

There is a lot of difference between investing in an RD and making a systematic investment in an equity fund. The only thing similar between the two options is the mode of investing, which is through monthly instalments. While recurring deposits are safe investments and assure you a fixed interest every year, equity mutual funds are market-linked instruments that do not guarantee any returns. Their returns, earned mainly by way of capital gains on the stocks they own, depend entirely on stock market behaviour.

The returns (capital gains) that equity funds earn can vary from year to year and if the market declines, their NAV can register losses too. However, having said this, equity funds can also earn you much higher returns than recurring deposits over the long term. Therefore while weighing an investment in an equity fund against a recurring deposit, the key trade-off that you make, is whether you would like to seek higher returns, by taking on a higher risk of losses.

Just consider HDFC Midcap Opportunities Fund, the fund you have chosen for a SIP. This is an open-end equity fund which invests mainly in mid-cap stocks (stocks that represent emerging businesses). The fund has been a good performer in its category with a 38 per cent annualised return in the last three years, 22 per cent in five years and a 17 per cent annual return since launch. A recurring deposit would have earned you between 6.5 and 9.5 per cent, depending on when you invested, in the same period.

While HDFC Midcap Opportunities has doubled your money every 4.5 years, the recurring deposit would take eight years to double your money. But then, with the recurring deposit you would have never had to face any losses. However, in 2008, a bad year for stocks, HDFC MIdcap Opportunities Fund suffered a loss of 51 per cent.

Apart from the return and risk profile, equity funds differ from recurring deposits on taxation. Equity funds, if held for over a year, are exempt from capital gains tax. The dividends they declare are also tax-free in your hands. But recurring deposit interest is taxed at your income tax slab rate. This, however, should not be your prime consideration for investing in SIPs.



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