FD vs SIP: Which Investment is Right for You?

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? Let's find out.

Difference Between SIP and Fixed Deposits: An Overview

Are you confused in deciding between Fixed Deposit (FD) and the Systematic Investment Plan (SIP) to invest your hard-earned money? Wondering which financial product can provide good returns? 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 an FD?

FD is an investment channel provided by banks or NBFCs where you can deposit a lump sum amount for a specific tenure at a fixed rate of interest. At the end of the agreed term, the investor gets back the interest and principal amount. Breaking an FD is discouraged as it attracts a penalty. Fixed deposits are viewed as the safest option that yields assured returns on the investment.

What is a SIP?

SIP is a way of investing in mutual funds. 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.). Investment in SIP schemes can be started with just ₹500 per month. Since SIPs are market-linked, there is an element of risk involved.

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 at will. 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 is low-risk. The chance of loss is unlikely as the interest is fixed for the entire tenure. SIPs, on the other hand, pose some level of risk as they are affected by market movements. However, during a bullish run, SIPs have the potential to deliver high returns on the investment. A portfolio through SIP enables diversification across different categories of mutual funds like debt-funds, equity-funds, hybrid funds, etc. This helps in spreading the overall risk factor.

Liquidity

Fixed Deposits come with a set lock-in period; hence they offer little liquidity in terms of withdrawal. Also, most financial institutions levy a penalty on premature termination of FD. SIPs, on the other hand, offer higher liquidity as the investment is open-ended, and you can redeem at any time without impacting its market value. And yes, no fine is charged for stopping a SIP.

Tax Implications

The tax on FD is charged at the current income tax slab of an individual if the deposit tenure is less than five years. No capital gain tax is imposed if the equity mutual fund units are 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. To reap benefits, the investment horizon of SIP should be long term. It helps in wealth accumulation and building a corpus through the compounding factor.

Both SIP and FD are popular investment choices for people in India to generate wealth. FD's are a smart choice of investment for conservative investors with a low-risk appetite as they guarantee the safety of the invested capital. SIP's, on the other side, caters to a wide range of investors having diverse risk profiles.

While the Systematic Investment Plan edges out Fixed Deposits on all many counts such, the decision should be made based on your risk profile and financial goals.