FD vs SIP - Which is Better

Investing your hard-earned money wisely is vital for successful financial planning and for ensuring a stable financial future. While there are multiple investment options available in the market, Fixed Deposits (FDs) and Systematic Investment Plans (SIPs) stand out for their unique benefits and popularity. Fixed deposits have long been popular among risk-averse investors due to their steady returns. SIPs, a type of mutual fund investment, present an opportunity for higher returns by utilising the influence of the stock market. But, choosing between FD vs SIP requires understanding their distinctive features, advantages, and risks. Let’s find out more.

What is SIP?

A Systematic Investment Plan (SIP) is an approach to making disciplined investments in mutual funds. It entails investing a set amount of money in a mutual fund scheme on a regular basis, usually monthly. This strategy allows investors to create a significant corpus over time without requiring a substantial initial investment.

SIPs are incredibly flexible, allowing you to start with as little as ₹500. The invested sum is used to purchase units in the mutual fund scheme, and the number of units bought is determined by the fund's Net Asset Value (NAV) at the time of investment. SIPs benefit from compounding and rupee cost averaging, making them an attractive option for long-term wealth growth.

What is FD?

Fixed Deposits (FDs) are a conventional investment option provided by banks and Non-Banking Financial Companies (NBFCs). It entails making a lump sum deposit for a specific amount of time at a fixed interest rate. FDs are recognised for their safety and guaranteed returns, making them a popular choice among conservative investors.

The interest rate on FDs is determined at the time of investment and remains constant over the term. This gives you transparency regarding the returns you'll receive. FDs can have a range of tenures, from a few days to several years, and you can choose to get regular interest payouts or reinvest your money to benefit from compounding.

Benefits of FD

• Safety and Security:

  FDs are regarded as one of the safest investment alternatives since they are unaffected by market volatility. The capital and interest are guaranteed, making this a low-risk investment.

• Fixed Returns:

  The interest rate on FDs is set at the time of investment, resulting in predictable and steady returns. This aids in financial planning because you know exactly how much you will get upon maturity.

• Flexibility in Tenure:

  FDs let you term of tenure that corresponds to your financial goals. Depending on your requirements, you can choose between short-term and long-term fixed deposits.

• Regular Income:

  FDs offer the option of receiving regular interest payments, which can be monthly, quarterly, or yearly. As a result, they are an excellent option for anyone seeking a consistent source of income.

• Tax Benefits:

  Section 80C of the Income Tax Act provides tax benefits for specific types of FDs, including tax-saving FDs.

Benefits of SIP

• Disciplined Investing:

  SIPs encourage disciplined investment by requiring regular payments. This promotes saving habits and provides constant investment regardless of market conditions.

• Power of Compounding:

  SIPs make use of compounding, in which returns are reinvested to create greater profits. Over time, this increases the growth of your investment.

• Rupee Cost Averaging:

  By investing a specific amount at intervals, SIPs profit from rupee cost averaging. This means that you acquire more units while prices are low and fewer units when prices are high, resulting in an average cost of investment.

• Flexibility and Convenience:

  SIPs are extremely flexible, enabling you to begin with a small amount and raise it over time. You may also specify the frequency of your investments, such as monthly, quarterly, or weekly.

• Higher Returns:

  SIPs invest in market tracking mutual funds. Compared to FDs, this is riskier, but it also offers the potential for higher returns, especially over the long run.

Difference Between SIP and FD

• Investment Amount

  1. FD: Requires initial lump sum investment. The minimum amount varies per the bank or NBFC but usually starts at ₹1000.
  2. SIP: Allow for small, regular investments. You may start with just ₹500 per month.

• Interest Rate

  1. FD: FDs provide a set interest rate at the time of investment. This rate remains steady during the duration.
  2. SIP: Returns are market-linked and based on the performance of the mutual fund scheme. There are no set interest rates.

• Liquidity

  1. FD: Funds are locked in for a specific term. Premature withdrawal is possible but it may result in fines and lower interest rates.
  2. SIP: SIP is more liquid since mutual funds can be redeemed at any moment. Certain exit loads, however, may apply if withdrawn before a specific time period.

• Risk Involved

  1. FD: Low risk as returns are assured and not affected by market changes.
  2. SIP: Increased risk due to market volatility. The value of investments might change according to market conditions.

• Returns

  1. FD: Provides fixed returns, offering stability and predictability. Returns are typically lower compared to market-linked instruments.
  2. SIP: Potential for larger returns, particularly in the long run. Returns vary based on the mutual fund's performance.

• Tenure

  1. FD: FD is suitable for both short and long-term goals. You can select a duration that ranges from a few days to several years.
  2. SIP: SIPs are ideal for medium- to long-term targets. To fully utilise the benefits of compounding and market growth, the recommended duration is often five years or longer.

Conclusion

The decision between FD and SIP is based on your financial objectives, risk tolerance, and investment horizon. Fixed deposits are ideal for conservative investors looking for stability and assured returns. They provide consistency and are best suited for short to medium-term goals. SIPs, on the other hand, are better suited to individuals who are ready to accept some risk in exchange for the potential of greater returns. They promote disciplined investment and are great for long-term wealth building. Finally, a balanced strategy that combines both FDs and SIPs in your investing portfolio will help you meet your financial targets while effectively minimising risk.