Category : New to Investing October 18, 20245 minutes read
In India, SIPs and Fixed Deposits are popular investment options. To accurately compare SIP vs Fixed Deposit it is necessary to understand their pros and cons. Investors may then determine which investment option may potentially be more suitable for them. Systematic Investment Plans allow investors to make periodic investments and potentially benefit from the effects of Rupee Cost Averaging. The key difference between SIPs and FDs is their risk-return ratio. Although SIPs may potentially aid long-term wealth creation, they may be a high-risk investment option. Fixed Deposits allow investors to invest a lumpsum at a predetermined interest rate and maturity period. These investments are a relatively low-risk-return investment option, however, investors may face charges for premature withdrawal.
The main difference between SIP and FD is their risk-return ratio. While the risk level in SIP may vary, they are generally higher risk and vulnerable to market volatility and fluctuations. However, they have the potential to aid wealth creation in the long term. Contrarily, FDs are generally a low-risk-return investment. Returns of FDs are fixed and they are relatively less vulnerable to risk.
SIP and FD investments both offer different benefits to investors. Investors seeking to make periodic investments in mutual funds, with a higher risk appetite may benefit from SIPs. Contrarily, investors seeking a low-risk-return investment option may potentially benefit from FDs.
SIP or Fixed Deposits may be suitable for long-term goals. However, investors seeking long-term wealth creation may potentially benefit from high-risk-return investments via SIPs. Investors seeking long-term optimal returns may potentially benefit from Fixed Deposits. For personalised financial advice, investors can reach out to financial advisors to better understand their risk tolerance and investment options.
The taxation of an SIP investment varies depending on the fund it is invested in. All mutual fund investments are subject to STCG tax and LTCG tax based on the holding period. However, in the long run, LTCG tax on SIPs may be relatively lesser. SIPs in ELSS funds are a tax-saving alternative. Investors can claim deductions up to ₹1,50,000 in ELSS investments. On FDs, TDS is not deducted on interest up to ₹40,000. For senior citizens, TDS is not deducted for interest up to ₹50,000.
The main disadvantage of Fixed Deposits is their relatively lower returns and penalties on premature withdrawal of funds. Systematic Investment Plans may be subject to market risks and high fees.
Introduction
Systematic Investment Plans (SIP) and Fixed Deposits (FDs) are both modes of investment. In a Systematic Investment Plan (SIP), an investor makes regular contributions of a fixed amount. This investment plan aims to encourage investors to save and invest regularly. SIPs may have varying maturity periods and risk levels, based on the asset they invest in. Fixed Deposits (FDs) are a type of fixed-income plan that offers investors a percentage of interest on the principal amount. They are different from fixed-income mutual funds; the principal amount in FDs is guaranteed, in fixed-income mutual funds the principal amount may be subject to market risks. They are generally low-risk investments and have a fixed maturity period.
This guide will explore SIPs vs Fixed Deposits in detail by analysing their meaning, pros, and cons. Furthermore, we will analyse the key differences between the two investment modes to better understand which investment option may be suitable for investors.
To understand SIP vs Fixed Deposit, it is necessary to understand how Systematic Investment Plans work. SIP is a method of investing in mutual funds. Through SIPs, investors can invest a fixed sum in a scheme of their choice at periodic intervals. Investors may choose a fund based on their risk tolerance and investment goals.
Benefits of Systematic Investment Plans
There are several benefits of investing in mutual funds via SIP.
Periodic Investments & Minimum Investment Amount
A key difference between SIP and FD is that Systematic Investment Plans (SIPs) allow investors to make periodic payments. Investments in SIPs can be made on a monthly or quarterly basis. Moreover, investors can invest an amount as small as ₹500. This makes SIPs a potentially suitable investment option for salaried individuals, who wish to invest small amounts of money regularly.
Potential Benefits of Rupee Cost Averaging
We cannot compare fixed deposits vs mutual fund SIPs without considering the significance of Rupee Cost Averaging. SIPs encourage investors to invest a fixed amount of money at regular intervals regardless of market conditions. Regardless of the Net Asset Value (NAV), making monthly investments over a long timeframe can potentially reduce the effects of volatility and aid long-term wealth creation.
Potential Benefits of Compounding
Compounding may potentially help investors in creating wealth in the long run. The amount of interest that is earned on savings is added back to the principal amount and re-invested. The interest is then calculated on the new principal amount, thus potentially increasing returns in the long run.
Disciplined Saving and Investing
Systematic Investment Plans encourage investors to save and invest periodically. This discipline is essential for potential long-term wealth creation. Moreover, SIP investments can be automated, and require minimal intervention from the investor on a monthly basis.
Higher Potential Returns
A vital factor to consider when comparing SIP vs Fixed Deposits is their potential for returns. By benefiting from Rupee Cost Averaging and the power of compounding, SIPs have the potential to aid wealth creation in the long term. Moreover, SIPs in equity schemes may be suitable for investors seeking to create wealth in the long term. However, potential SIP returns may be vulnerable to market conditions and fluctuations. Returns in mutual funds are not guaranteed and are subject to several risks including market risks, interest rate risk, price risk, concentration risk, etc.
Disadvantages of SIPs
To accurately compare Systematic Investment Plans vs Fixed Deposits, it is necessary to understand the drawbacks of investing in Systematic Investment Plans.
Market Risk
While comparing SIP vs Fixed Deposits it is integral to understand the level of risk associated with either of the investment options. Investments made via Systematic Investment Plans are subject to market risks. Investments in equity and hybrid funds may be particularly sensitive to market fluctuations and volatility. Debt instruments may be subject to credit risk, interest rate risk, etc. Investors must always evaluate the risk level of an SIP investment before investing.
Expense Ratios
Another crucial drawback to consider while comparing fixed deposits vs mutual fund SIPs is the expense ratio. Investors may be subject to additional fees when investing in mutual funds. These are the fees charged by the AMCs to manage the mutual fund. Over time, additional fees may impact the potential returns of a SIP.
Start a SIP with Bandhan Mutual Fund and potentially benefit from Rupee Cost Averaging in the long run
Systematic Investment Plans are a method of investing in mutual funds. Investors can make periodic investments in any scheme that meets their risk appetite and investment horizon. SIPs may be beneficial through the power of compounding and the effects of Rupee Cost Averaging. Investors may invest and save in a disciplined manner. SIPs in certain schemes have the potential to give better returns. However, some drawbacks of SIPs include their vulnerability to market risk and significant expense ratios.
Fixed Deposits are a type of fixed-income investment plan that have a predetermined maturity period. The interest rate on the principal amount is determined at the time of making the investment and investors get access to the interest only once the principal amount is withdrawn. The main difference between SIP and fixed deposit is that the interest rate on FDs is fixed while returns of SIP is determined by market conditions. A fixed interest rate on FDs reduces the level of risk, potentially making them a suitable option for investors with a low-risk appetite. The benefits of investing in fixed deposits include:
Benefits of Fixed Deposits
Relatively Lower Risk
Fixed deposits are regulated by the Reserve Bank of India (RBI) and are thus considered a low-risk investment option. The interest rate and maturity period of fixed deposits are predetermined. They are not subject to market risks and fluctuations, consequently, making them a low-risk investment option. Investors with a low-risk appetite who are comparing SIP vs Fixed Deposit may potentially benefit from FDs.
Fixed Returns
A Fixed Deposit’s returns are guaranteed and determined at the time of the investment. An investor knows exactly how much they will make at the time of the investment. Returns are not subject to fluctuations or based on market risks.
Loan Against FDs
Investors can use the funds in an FD to take a loan, rather than taking an unsecured loan. This may be useful in emergencies, without negatively impacting the interest earned on the initial deposit.
Disadvantages of Fixed Deposits
Lower Returns
Returns on investment are a crucial criterion to consider before investing in any scheme. In comparing SIP vs Fixed Deposits investors must remember that Fixed Deposit investments generally have lower returns. They are a low-risk-return investment option and may not be suitable for investors seeking to create wealth.
Penalty on Premature Withdrawal
Although investors can withdraw their funds from Fixed Deposits prematurely, they may have to pay a penalty fee. This penalty fee may vary based on the bank and the amount of money deposited.
Start investing periodically via SIPs and gain the potential benefits of compounding.
Fixed Deposits are a type of fixed-income investment, in which investors invest a lumpsum amount of money for a fixed period of time. The interest rate is predetermined and the principal amount is guaranteed. One of the key benefits of Fixed Deposits is that they are a low-risk investment and provide fixed returns. Moreover, investors can avail of loans against FDs. One key drawback of Fixed Deposits is their lower potential returns. Moreover, investors may need to incur a penalty for premature withdrawal.
Now that we understand the pros and cons of Systematic Investment Plans and Fixed Deposits, let’s further understand the differences between them.
| Parameter | Systematic Investment Plan | Fixed Deposit |
| Risk | Varying levels of risk based on the mutual fund.
|
Low-risk investment option. |
| Liquidity |
|
|
| Interest Rate | Interest rate may vary based on the type of scheme and is subject to change based on market conditions. | Predetermined interest rate and does not change based on market conditions. |
| Investment Type | A fixed sum of money is invested at periodic intervals. | Lumpsum amount is invested. |
| Dividends | Investors investing in equity mutual funds may potentially benefit from dividends that may be received monthly, quarterly, annually. | FDs do not receive dividends. |
| Potential for Wealth Creation | SIPs in mutual funds may potentially aid long-term wealth creation for investors. | Interest rates of FDs are generally lower, and may potentially give investors optimal returns. |
When comparing SIPs vs Fixed Deposits investors must identify their risk tolerance and investment goals to determine which investment avenue may be more suitable for them. Determining which is better is highly subjective and depends on several factors.
Investing in Systematic Investment Plans may be suitable for investors:
- Seeking potential wealth creation in the long term
- Seeking periodic investments
- With a higher risk appetite
Investing in Fixed Deposits may be suitable for investors:
- With a low-risk appetite
- Seeking optimal returns
- Seeking a lumpsum investment option
- To compare SIP vs Fixed Deposit, it is necessary to understand the advantages and disadvantages of both investment options.
- Systematic Investment Plans allow investors to make periodic payments in a mutual fund scheme suited to their risk appetite and investment goals.
- Investors may benefit from SIPs due to the power of compounding and Rupee Cost Averaging. Moreover, investors may develop a disciplined habit of saving and investing, which may further aid long-term wealth creation.
- However, an important factor to consider while comparing Fixed Deposits vs mutual fund SIPs is the vulnerability of SIPs to market risks and volatility. These investments may be vulnerable to credit risk, inflation risk, interest rate risk, concentration risk etc. Moreover, mutual funds may have a higher expense ratio, which may negatively impact returns.
- Fixed Deposits are fixed-income investments that allow investors to invest a lumpsum for a specific period of time. The interest rate is predetermined.
- Fixed Deposits may be beneficial for investors seeking a low-risk-return investment as they offer fixed returns. They are regulated by the Reserve Bank of India (RBI) and are consequently less risky.
- Investors can also take loans against their FDs, which may be safer than unsecured loans.
- The main drawback of Fixed Deposits is their relatively lower returns. Moreover, investors may have to incur a penalty fee on premature withdrawal.
- While comparing SIP vs Fixed Deposits some key parameters that differentiate the investment options are: potential for wealth creation, risk, liquidity, interest rate and dividends.
- Investors comparing SIP vs Fixed Deposits must consider their risk appetite and investment goals before investing.
