Systematic deposit plan: what is SDP and what is its advantage over SIP?
With the Systematic Investment Plan (SIP) in Mutual Funds (MF) – particularly in equity-focused MF schemes – coming into the spotlight, other organizations offering fixed-return instruments are also seeking l opportunity to introduce systematic investment avenues.
For example, Bajaj Finance launched the Systematic Deposit Plan (SDP), which allows investors to invest on a monthly basis instead of investing in a lump sum.
Although the name is similar to SIP, SDP is more comparable to recurring deposits (RD) offered by banks and the post office.
Like RD and SIP, SDP allows a risk-averse investor to make regular investments out of their monthly earnings.
Thus, for an investor who finds it difficult to make large investments all at once, SDP offers the possibility of making continuous investments.
SDP versus SIP
The main motive for investing in equity-oriented MF programs through the SIP is Rupee Averaging, where investors take advantage of market fluctuations by periodically investing the same amount. With stock markets fluctuating all the time, SIP allows an investor to invest in both bull and bear markets.
During the bull market, the net asset value as well as the value of the entire investment increases, while in the bear market, the same investment returns a greater number of units, giving investors the opportunity to realize gains higher when the market goes up.
However, since the interest rate remains the same over an investment period, investors do not get any additional gain by dividing lump sum investments into periodic investments. In fact, each subsequent deposit will earn less than the previous deposit on a given date.
Thus, SDP does not provide other benefits, but to allow periodic investment opportunities for investors, who do not have money for lump sum investments.
On the other hand, SIP helps an investor to reduce investment risks by providing an opportunity to invest in both bullish and bearish market cycles and thus earn a higher return.
So, SDP is not comparable to SIP, but its functionality is more like RD.