Should I Invest In SIP or FD?
Updated On Jun 07, 2023
Table of Contents
SIP Systematic Investment Plan is one of the methods of investing in mutual funds. Through SIP, individuals can invest a fixed sum of money at regular intervals – weekly, monthly, quarterly, etc., in any of the mutual fund schemes. The money is auto-debited from the investor’s bank account on a selected date and directed towards the mutual fund scheme chosen by the investor. Usually, Systematic Investment Plans SIP is a preferred investment option among mutual fund investors. It helps them to invest in a disciplined manner without worrying about market volatility and timing the market. Also, SIPs are least affected by market volatility due to rupee cost averaging.
A fixed deposit is financial instruments offered by banks, post offices or NBFC (Non-Banking Financial Company). A certain lump sum amount is deposited in a bank fixed deposit for a specific period ranging from 7 days to several years. The FD rate offered is higher than the regular savings account or salary account. However, breaking a bank fixed deposit is not encouraged. A premature withdrawal is allowed for an early closure penalty.
Fixed deposits are safe investment instruments. Different types of Fixed Deposit Schemes are offered where investors can choose based on their short term or long term goals. Also, fixed deposits offer assured returns on the investment. Investors can also get a loan against their FD depending on the amount. Furthermore, deposits up to INR 1lakh are insured under the Deposit Insurance and Credit Guarantee Scheme of India.
Compare SIP Vs FD
The following are the key parameters to understand SIP vs FD
Minimum Investment Amount
In Mutual funds SIP mode, the minimum investment amount starts with INR 500. Hence, such a small amount does not pinch people’s pockets. Moreover, the SIP frequency can be weekly, monthly or quarterly on investor’s convenience.
In Fixed Deposits, the minimum investment amount ranges from INR 1000 – 10000. Also, one can invest in FD in lump sum mode only. Therefore, investors cannot keep investing the amount like SIP.
Returns
In SIP, the returns are fluctuating. The SIP returns are entirely dependent on the performance of the stock market. If the stock market performs well, the mutual funds’ SIP performs accordingly. Thus, during the bull market, SIPs tend to deliver better returns than fixed deposits.
In a Fixed Deposit, the returns are predetermined. During the fixed deposit investment, the returns are secure payments throughout the tenure of the investment. The fixed deposit return depends on the bank chosen by the individual.
Risk
There is a phrase “Mutual funds investments are subjected to market risk” floating in the market. This is because every mutual fund investment is linked to market risk. Also, the risk depends on the type of fund SIP chosen. Hence, SIPs tend to be affected by market movements.
The risk in an FD is comparatively low. The depositor will continue to receive the interest payment along with the principal amount. Therefore, fixed deposits are not affected by market movements. However, a bank can still go bust. In such a case, FDs have insured up to INR 1 lakh under the Deposit Insurance and Credit Guarantee Scheme of India.
Investment Tenure
Generally, SIP investments are preferable for the long term horizon. Also, SIPs are referred to in the context of equity funds. It means that, the longer the investment horizon, the better are the revenues. The compounding factor also helps investors in wealth accumulation and builds a corpus over some time.
Fixed Deposits are traditional investment avenues. One can invest in both short term and long term investment purposes. The tenure of fixed deposits can be 6 months, 1 year and go up to 5 years.
Liquidity
SIP investment is more liquid in comparison to FD. In the case of SIP, one can redeem their investment anytime. For equity mutual funds, the amount gets credited in T+3 days. For debt funds (Fixed income funds), the amount gets credited in T+2 days in the investor’s bank account. Also, one can stop SIP without paying any charges.
Fixed deposits are not easy to redeem as they come with a lock-in period. One needs to wait till the end of the tenure to receive the amount. However, premature withdrawals are allowed with a penalty fee.
Taxation
Investment in mutual funds through SIP is subject to short term capital gains (STCG) or long term capital gains(LTCG). In case of equity mutual funds, short term capital gains is chargeable flat 15%. Whereas, long term capital gains is chargeable at 10% for the earnings above 1 lakh. However, LTCG is chargeable at 20% after indexation in debt funds, whereas STCG is as per the individual income tax slab rate. Moreover, investing in a tax-saving scheme, i.e. ELSS funds (Equity Linked Savings Scheme) through SIP mode provides a tax exemption under Section 80C up to INR 1.5 lakhs in a financial year.
Fixed deposits taxation is as per the depositor’s income tax slab rate. Also, FDs are subject to 10% TDS on interest earned over INR 10,000 in a financial year. One can also invest in a tax saving FD to avail tax benefit under Section 80C up to INR 1.5 lakhs.
Conclusion
In India, both SIP and FD Fixed Deposits are one of the investment choices for individuals who wish to create wealth over a period of time. FDs are a secure investment option available to investors looking for the safety of their capital. On the other hand, SIPs can also be beneficial, taking into consideration all the risk factors. Furthermore, SIPs caters to a wide range of investors having diverse risk profiles.
