Rs 10,000 a month investment: How does post office RD compare against SIP in MF?

Kolkata: The investment instrument available in the Indian financial theatre is expanding rapidly. If one has an amount of money to invest every month, he/she can do so in a number of instruments across the risk spectrum. While on the one hand there are avenues such as the post office recurring deposit, on the other there are mutual funds that offer a much riskier instrument, if not the most risky in the market.

However, one must remember that the general principle is that when an instrument offers a great degree of security of the capital invested, the returns are generally on the lower side. The converse is also true -- higher risk is generally accompanied by higher return. Let's take the example of an individual who can invest Rs 10,000 every month. Let's assume this person chooses to invest in post office RD and equity mutual fund schemes.

The post office recurring deposit (RD) is a popular scheme for a large number of Indians, who prefer to invest in safe but guaranteed-return instruments. The post office RD has a tenure of five years and it offers an interest of 6.7%. It also offers quarterly compounding.

A post office recurring deposit return calculator will help anyone to do the interest calculation. In this case, the investor will be able to generate a return of Rs 1,13,658.29 on a nominal investment of Rs 6 lakh. Therefore, the total maturity amount will come to Rs 7,13,658.29. The point to note is that there is no volatility in post office RD unlike market linked instruments such as equity mutual funds, the calculation for which will follow next.

The point with mutual fund returns is that they vary from scheme to scheme. Let's take the example of a mutual fund scheme that offers a moderate 10% CAGR (compounded annual growth rate) return on average for five years. Anyone who invests Rs 10,000 a month in such a scheme could see the value of his/her investments balloon to Rs 780,824m at the end of five years.

Now, let us assume the person invests the same amount a month for five years in an equity mutual fund scheme that delivers a CAGR of 12%. Many funds offer this rate of return and this is the template return for many SIP calculators. The amount, in this case, will come to Rs 8,24,864 at the end of the fifth year.

For a moment consider some of the top-performing mutual fund schemes. The Quant Small Cap Fund has delivered a return of 34.63% BAGR over the past five years, reports show. If this person invests in an MF scheme that delivers even 30% CAGR, he/she can reap a value of 13,93,914 in the same time period. Therefore, it is clear that equity MFs can beat post office RD hands down in returns.

However, all equity mutual fund schemes suffer from volatility depending on the volatility in the secondary market. One should ideally speak to personal investment advisors who can guide an individual to the right choice depending on his/her risk appetite and financial goals.