FD VS SIP: Which Offers More Bang for Your Buck?
There are numerous investment options in the capital market that have unique features and different return potential. However, investors often confuse two of the most sought after investment instruments; Fixed Deposit (FD) and SIP (Systematic Investment Plan). Should you stick to standard fixed deposit (FD) or consider SIP for investment? Which is a better option that will give you value for money?
Difference Between SIP and Fixed Deposits: An Overview
While both are excellent investment avenues, they are different entities with unique features and characteristics. Let's compare the two modes of investment on key financial parameters to help you make an informed decision. But first, a little about what these terms mean.
What is a Fixed Deposit?
Fixed Deposit (FD) is an investment option provided by banks or NBFCs where you can deposit a lump sum amount for a specific tenure at a fixed rate of interest. With an FD, you receive fixed interest at regular intervals. The bank or the NBFC repays the principal amount at the end of the tenure. Fixed deposits are viewed as the safest option that yields assured returns on the investment. However, breaking an FD before the tenure attracts a penalty. .
What is a SIP?
SIP or Systematic Investment Plan is a way of investing in mutual funds with an amount invested at regular intervals. It is a disciplined and automated investing mechanism that allows individuals to deposit a specific sum of money at predetermined intervals (weekly, monthly, quarterly, etc.) in selected mutual fund schemes. Investors can start investing in SIP schemes with just Rs 500 per month. Since SIPs are market-linked, there is an element of risk involved
SIP VS FD: Key differences between the two investment methods
-
Investment Amount
Investment via SIPs in mutual funds is pocket-friendly. You can start investing in mutual funds through SIPS with as little as Rs.500/month. It also offers the flexibility to change the amount and the term plan accordingly. Further, the frequency of auto-debits can be fixed as per convenience.
In contrast, FDs require a lump sum payment of Rs. 1,000-5,000 for a fixed duration.
-
Risk & Returns
Investment in FD's comes with low risk as the potential of loss is unlikely owing to fixed interest payouts at regular intervals.
SIPs, on the other hand, pose some level of risk as they are affected by market movements. However, during a bullish run, SIPs can deliver high returns on investment. A portfolio through SIP enables diversification across different categories of mutual funds like debt funds, equity funds, hybrid funds, etc., spreading the overall risk factor.
-
Liquidity
Fixed Deposits come with a lock-in period; hence they offer little liquidity. Furthermore, most financial institutions levy a penalty on premature termination of FDs.
SIPs, on the other hand, offer higher liquidity as the investment is open-ended, and you can redeem your holdings at any time without impacting its market value, without any charge for stopping a SIP.
-
Tax Implications
The tax on FD is charged at the current income tax slab applicable to an individual if the deposit tenure is less than five years.
No capital gain tax is imposed if the SIP in equity mutual fund units is sold after a year of purchase.
-
Tenure
You have the flexibility to choose your own FD term. You can open an FD deposit for a tenure ranging from 6 months to 10 years or more.
However, for earning good returns through SIPs, the investment horizon of SIPs should be long term. It helps in wealth accumulation and building a corpus through the compounding factor.
SIP VS FD: Which Is Better?
Both SIP and FD are popular investment choices for people in India to generate wealth and earn returns on their investments. FD's are a smart investment choice for conservative investors with a low- risk appetite as they guarantee the safety of the invested capital. On the other hand, SIP caters to a wide range of investors with diverse risk profiles. While the Systematic Investment Plan can offer better returns than FDs, they do come with a higher risk profile. Hence, you should decide between the two based on your risk profile and financial goals.