Which is better for investing: SIP or fixed deposit? Everyone has this question on their thoughts. One is offering extreme safety with low returns and other is offering better returns with market risk. Which one to go for?
In this post we will talk for all the aspects both in much detail.
Let’s understand it one by one
Table of Contents
What is Fixed Deposit?
A fixed deposit is a lump sum deposit with the bank or financial institution. Fixed deposit is a safe investment as it offers fixed interest rate for a specific duration. Fixed deposit investment duration varies from 7 days to 10 year. One can choose duration as per his own requirements.
What is SIP?
SIP stands for Systematic Investment Plan. SIP is a monthly payment scheme for a chosen time period.
SIP is not a scheme but it is a way to invest in mutual funds. One can choose investment duration and amount as per own choice.
Read more about mutual fund
There are two ways to invest in mutual fund scheme:
- Lump Sum Payment
- Systematic investment Plan Or SIP
For example, you have started Rs. 10000 SIP each month in a mutual fund scheme for 10 years.
Read more about how to start Mutual Fund SIP investment : Mutual Fund SIP
Benefits of SIP investment
Now a days one can buy SIP for income generation ( in future) also. Read more about it
SBI Mitra SIP – A Powerful Tool To Get Monthly Income
SIP or Fixed Deposit – Which is better & WHY?
Safety
FD offers safe and secure fixed returns. The return and duration is fixed for Fixed deposit.
Pros: Interest rate is fixed and therefore does not change with time.
Cons: One had to pay a penalty and reduced return on premature withdrawal.
SIP returns are neither guaranteed nor fixed in nature. SIP investment can be a risky affair in the short term. One can choose any duration as per own choice.
Pros: One can withdraw money from a mutual fund anytime and also stop monthly payment any time.
Cons: Withdrawal before a specified time may attract exit load.
Risk:
Fixed Deposit return is guaranteed therefore risk is low to negligible.
Cons: Fixed deposits offer low return as compared to other investments.
SIP returns are market linked and thus it provides variable returns. Just like bank FD rates differ from bank to bank and duration based, SIP returns also vary from scheme to scheme.
Pros: SIP offers inflation adjusted moderate to high return in the long run( more than 5 years).
Returns:
Usually Fixed Deposits provide low returns but known for their safety and fixed returns.
Whereas mutual fund SIP provide good returns in the long run.
Liquidity:
Fixed deposits are highly liquid in nature and therefore one can withdraw money from fixed deposit any time.
Cons: One has to pay a penalty and reduced rate of return in case of premature withdrawal.
Even Mutual Fund SIPs are also very liquid in nature ( except ELSS Funds and Close ended funds). One can stop SIP in between and withdraw money anytime.
Cons: One has to pay exit load if withdrawn before a specified time.
Taxation:
Gains from Fixed deposit are taxable in nature. Tax is deducted in the form of TDS. These Gains are added to income and taxed as per the income tax slab rate of the holder.
In case of SIP, the gains can be categorized on the basis of type of scheme and holding period.
But still the gains taxes are lower as compared to fixed deposit.
Additional Reading: How SIPs are taxed?
Is Fixed Deposit a good investment?
Fixed deposit is a boon for risk averse investors. In fact, Fixed deposit is an age old favorite investment for no risk takers.
But FD has its own merits such as fixed and safe returns, ease of use and liquidity.
However, for investment purposes SIP outshine FD because of returns only.
Fixed Deposit can be chosen for altogether different purposes such as short term investment ( 3 months-1 year) or for a contingency fund.
Conclusion
SIP and FD, both are supreme products in itself. FD is a one time investment scheme with safe and fixed return whereas SIP is a monthly investment scheme which provides variable returns.
If investment is concerned then SIP returns are far better as compared to a FD. Even gains from SIP attract a lower tax regime.
MF SIPs offer higher flexibility as one can stop payment in between ,withdraw full or partial amounts from SIP investment, and increase SIP investment amount also.
But the major drawback is market linked variable returns. In a downtrend market SIP returns may turn negative in the short run.
If Safety is concerned then FD is far better than SIP investment. FD can be used when one require safe and secure fixed rate of return, for contingency funding and short term investment duration.
Additional Resources:
