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FD vs SIP – Which is Better for Investments?
Posted on Thursday, October 17th, 2024 | By IndusInd Bank
Indian investors usually prefer fixed deposits (FDs), a classic product. However, fintech is pushing them towards new investments. For example, mutual funds offer higher returns and more control. A Systematic Investment Plan (SIP) allows gradual investments in mutual funds and is a popular option nowadays. You can choose FDs for periods ranging from seven days to ten years. In this analysis, we’ll compare FDs and SIPs to help you decide.
A common issue is determining which option aligns better with their financial goals and risk tolerance. This is due to the contrasting nature of FDs’ stability and SIPs’ growth potential.
What is an FD?
A fixed deposit (FD) is a lump sum investment with a bank or non-banking financial company. You invest a set amount for a fixed time, from 7 days to 10 years, to meet your financial goals. The bank or NBFC pays a set interest rate, determined when you open the account. This rate is guaranteed and won’t change, even if market rates do.
You can receive tax benefits when you invest in a tax-saving fixed deposit for a minimum of five years, enhancing the benefits of FDs. The main objective of a fixed deposit is to preserve capital. You can use an FD Calculator to estimate your returns before you make your fixed deposit investment.
Also read: Tips for Maximising Returns on Fixed Deposits
What is an SIP?
A systematic investment plan is a method for investing that lets you make regular, fixed investments into debt or equity mutual funds. SIP investments are perfect for those new to the stock market and who do not want to make a lump sum investment all at once. SIPs are goal-oriented investments. They help investors form a disciplined and timely savings habit. Additionally, if you invest in SIPs for a year or longer, you benefit from tax advantages on your contributions.
Let us now take a look at the difference between SIP and FD.
| Parameters | Fixed Deposits (FD) | Systematic Investment Plans (SIP) |
| Nature of Investment | Lump sum investment | Investment in regular installments |
| Nature of Return | Guaranteed returns | Returns are market-linked and not guaranteed |
| Return Type | Interest is earned on the invested amount | Capital gains and dividends are earned on the amount invested |
| Ideal Investment For | Conservative investors with a low-risk appetite | Aggressive investors who have a medium to high-risk appetite |
| Liquidity | FDs have a lock-in period. Early withdrawal may incur a penalty. | Usually, you can withdraw funds anytime without affecting market value; exit fees may apply. |
| Tenure | Flexible tenure | Requires a substantial time commitment to earn desirable returns |
| Taxation | Tax charged depends on the investor’s income tax slab | If you sell mutual fund units after a year, long-term capital gains tax applies; selling before a year incurs short-term capital gains tax. |
Is FD Better Than SIP?
When deciding between SIP or FD, which is better depends on your risk tolerance, investment horizon, and financial goals.
You can take into account the following factors to help you decide between the two options:
- FDs are for cautious investors who want to minimise risk. SIPs are for aggressive investors who accept moderate to high risk in exchange for higher returns.
- You can invest in an FD with a one-time payment or a SIP with regular small payments.
- FDs focus on preserving capital, while SIPs aim for higher returns.
- Select an FD for a specific investment term or a SIP for flexible investment periods.
When one compares FD vs SIP, one must consider factors like the type of investment, return, risk, liquidity, tenure, and taxation. These factors will help you decide which option best fits your goals.
Unlock the potential of your savings with a Fixed Deposit! Secure guaranteed returns and enjoy peace of mind. Open your IndusInd Bank Fixed Deposit account today!
Disclaimer: The information provided in this article is generic and for informational purposes only. It is not a substitute for specific advice in your circumstances. Hence, you are advised to consult your financial advisor before making any financial decision. IndusInd Bank Limited (IBL) does not influence the views of the author in any way. IBL and the author shall not be responsible for any direct/indirect loss or liability incurred by the reader for making any financial decisions based on the contents and information.
