FD VS SIP: Which Offers More Bang for Your Buck?

Over the years, the world of financial markets has undergone significant changes, with the emergence of new financial instruments and the evolution of existing ones. From cryptocurrencies to mutual funds, fixed deposits (FDs), and government bonds, investors now have more options than ever before. However, the abundance of choices can often lead to confusion, leaving investors unsure of which option is right for them.

While Bitcoin has garnered attention recently, many potential investors in India are comparing Systematic Investment Plans (SIPs) and Time Deposits. With both SIPs and FDs offering different benefits, it is no surprise that investors find it challenging to choose between the two. In this article, we will differentiate between SIPs and FDs and highlight the benefits that each one offers to potential investors. Let’s see FD vs SIP

What is Systematic Investment Plan (SIP)?

A Systematic Investment Plan (SIP) is a type of investment product that allows individuals to invest small amounts of money in equity and debt instruments monthly. This is particularly beneficial for new investors who are looking to enter the world of mutual funds. In addition to the potential for good returns, investing in SIPs can also help to develop the habit of investing regularly, leading to the accumulation of a significant sum of money over time.

What is a Fixed Deposit?

Fixed Deposits (FDs) are a well-known investment option offered by banks and Non-Banking Financial Companies (NBFCs), where investors can deposit a lump sum amount for a fixed period at a predetermined interest rate. With an FD, investors receive interest payments at regular intervals, and the principal amount is returned at the end of the tenure. FDs are considered a popular and secure investment option that provides guaranteed returns. However, it is essential to note that withdrawing an FD before maturity can lead to a penalty. For individuals who prefer a risk-averse investment strategy and seek to earn a fixed income on their savings, FDs are an excellent investment choice.

FD vs SIP: What’s difference Between FD and SIP?

Category Systematic Investment Plan (SIP) Fixed Deposit (FD)
Definition SIP is an investment plan where an investor invests a fixed amount of money at regular intervals in a mutual fund scheme. FD is a type of investment where the investor deposits a lump sum amount for a fixed period at a fixed rate of interest.
Returns Returns are market-linked and depend on the performance of the mutual fund scheme. They can be higher than FD returns in the long run. Returns are fixed and predetermined at the time of investment.
Risk SIP involves market risk, and returns may fluctuate based on the performance of the mutual fund scheme. FDs are relatively low-risk investments as they offer a fixed rate of interest.
Liquidity SIPs are relatively more liquid, as investors can withdraw their investments at any time without any penalties. FDs are less liquid, as investors may have to pay a penalty or lose interest if they withdraw their investments before the maturity date.
Investment Period SIPs do not have any specific investment period and can be continued for as long as the investor wants. FDs have a fixed investment period, which can range from a few months to several years.
Taxation SIPs are subject to capital gains tax based on the holding period and the type of mutual fund scheme. FDs are subject to TDS (Tax Deducted at Source) on the interest earned, and the investor is also required to pay tax on the interest earned as per their tax slab.
Flexibility SIPs offer flexibility to investors, as they can increase or decrease the amount invested or even stop investing altogether at any time. FDs offer little flexibility, as the investor cannot change the investment amount or the investment period once the investment has been made.

Let’s take a look at a few differences in detail: 

  • Investment Amount

    Investing in mutual funds through Systematic Investment Plans (SIPs) is an affordable option as you can start with as little as Rs. 500 per month. Additionally, SIPs allow you to adjust the amount and duration of the investment plan to your liking. You can also set the auto-debit frequency at your convenience.

    On the other hand, Fixed Deposits (FDs) require a significant lump sum payment of Rs. 1,000-5,000 for a fixed duration.

  • Flexibility

    Fixed Deposits have a lock-in period, which means that you cannot withdraw your money until the term of the deposit is over. This lack of liquidity can be a disadvantage for investors who may need the money before the maturity date. Additionally, if you terminate the FD before the end of the term, financial institutions usually charge a penalty, which can result in a lower return on investment.

    In contrast, SIPs offer greater liquidity since there is no fixed maturity date for the investment. You can redeem your holdings at any time without affecting the market value of the investment. Moreover, stopping a SIP does not involve any charges or penalties, offering greater flexibility to investors.

  • Tax

    Fixed Deposits are subject to income tax, and the rate of tax is determined by the investor’s income tax bracket. Tax-saving FDs are a type of FD that allows investors to claim a deduction of up to Rs. 1.5 lakhs under section 80C of the Income Tax Act. However, all other types of FDs attract tax liability for the investor.

    In contrast, mutual fund investments are subject to long-term capital gains tax if the units are bought after 31st January 2018. The tax rate is determined by the investor’s income tax bracket. Additionally, if an investor sells mutual fund units before completing a year, they are subject to a short-term capital gains tax of 15%.

  • Rates of Interest

    Systematic Investment Plans (SIPs) generally offer higher rates of returns to investors in comparison to fixed deposits. However, it is important to note that the risk factor associated with SIPs is also higher due to the fluctuations in the stock market.

    Fixed deposits, on the other hand, are a low-risk investment option that assures a fixed rate of return to the investor.

  • Risk & Returns

    Investing in Fixed Deposits (FDs) is considered low-risk because the interest payouts are fixed and regular, reducing the possibility of loss.

    On the other hand, investing in Systematic Investment Plans (SIPs) involves some level of risk as the value of mutual fund units can be impacted by market movements. However, during a bullish market, SIPs have the potential to deliver high returns on investment. Furthermore, investing in a portfolio of mutual funds through SIPs allows for diversification across different categories such as debt funds, equity funds, hybrid funds, etc., which can help spread the overall risk factor.

What Are the Benefits of SIP Investment?

Investing in Systematic Investment Plans (SIPs) offers several advantages to investors:

  • Investors can invest according to their convenience and financial goals. They don’t need to physically visit investment companies or financial institutions to make investments. Additionally, SIPs allow investors to keep track of their investment performance easily.
  • SIPs are designed to invest at regular intervals, eliminating the need for investors to worry about market fluctuations or interest rates. This systematic approach helps investors build wealth over time.
  • SIPs offer tax benefits to investors who hold their investments for more than a year. This can be a significant advantage, as taxes can eat into an investor’s returns over time.
  • SIPs are typically offered as open-ended funds, which means investors can withdraw their funds at any time without any penalty. This flexibility allows investors to access their money when needed, providing a sense of financial security.

What Are the Benefits of Investing in FDs?

Fixed Deposits (FDs) offer several benefits to investors. The most significant advantage is that they provide guaranteed returns on investment, making them a safe and reliable investment option. The investments made in FDs are also risk-free. Other benefits include:

  • FDs offer investors flexibility in terms of investment amount and duration. They can choose the amount and the period for which they want to invest, making it easier to plan their finances.
  • Investors can avail of loans against their investments. This can be helpful in times of financial emergencies or when they need additional funds for specific purposes.
  • FDs can also be closed or used for overdraft withdrawal during emergencies, providing investors with a sense of financial security.
  • Investing in FDs can also help individuals build their credit history. They can apply for a car loan against their FD and become eligible for a credit card using their FD as collateral.
  • Additionally, investing in 5-year Tax Saving FDs can provide tax benefits to investors. This can be an added advantage, especially for those looking to save on taxes.

FD VS SIP: Is SIP Better Than FD?

SIPs and FDs are two popular investment options for people in India who want to grow their wealth and earn returns on their investments. FDs are an excellent choice for conservative investors with a low appetite for risk, as they offer guaranteed safety of the invested capital.

On the other hand, SIPs are suitable for investors with a range of risk profiles. Although they can potentially offer better returns than FDs, they come with a higher level of risk. Therefore, choosing between SIP and FD depends on an individual’s risk profile and financial goals.

Ready to invest in a safe and reliable option? Open a Fixed Deposit (FD) with Freo Savings today and watch your wealth grow. With guaranteed returns, flexible investment options, and the assurance of safety for your invested capital.

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