SIP vs FD: Know the Difference and Which is Better?

The capital market offers a wide range of investment opportunities, each with its own special qualities and possible returns. However, investors frequently mix up Fixed Deposits (FD) and SIP (Systematic Investment Plan), two of the most popular investment vehicles. Should you pursue SIP investing or remain with standard fixed deposits (FD)? Which one offers you the most value for your money?

Despite the fact that both are fantastic investment opportunities, they are different with distinct characteristics. For your benefit, let's compare the two investment strategies on some important financial indicators.

What is a Fixed Deposit?

A fixed deposit (FD) is a type of investment where you can deposit a lump sum of money for a set period of time at a fixed rate of return. You receive fixed interest from an FD at predetermined periods. At the end of the duration, the bank or NBFC repays the principal sum. The choice with the highest level of safety and guaranteed returns on investment is fixed deposits. However, there is a fee for ending an FD prior to the tenure.

What is a SIP?

Systematic Investment Plans, or SIPs, are a technique to invest in mutual funds by setting aside money at regular periods. It is a systematic and automated investing technique that enables people to make one-time deposits in a few different mutual fund schemes on a regular basis (weekly, monthly, quarterly, etc.). With merely Rs. 500 each month, investors can begin investing in SIP schemes. SIPs have a risk component because they are market-linked.

Difference Between SIP and FD:

Risk and Returns

Due to the set interest payments made at regular periods, investing in FDs carries a low risk of loss. SIPs, on the other hand, carry a certain amount of risk because they are influenced by market changes. SIPs, however, can generate large returns on investment during a bullish run. By diversifying a portfolio through SIP, one can lower overall risk by investing in mutual funds from a variety of categories, including debt, equities, hybrid, and others.

Investment Amount

SIP investments in mutual funds are cost-effective. SIPS allows you to start investing in mutual funds with as little as Rs. 500 each month. Additionally, it provides the freedom to modify the term plan and amount as necessary. Additionally, the frequency of auto-debits can be set as needed. FDs, on the other hand, need a one-time payment of Rs. 1,000–5,000 for a set period of time.

Liquidity:

Due to the set interest payments made at regular periods, investing in FDs carries a low risk of loss. SIPs, on the other hand, carry a certain amount of risk because they are influenced by market changes. SIPs, however, can generate large returns on investment during a bullish run. By diversifying a portfolio through SIP, one can lower overall risk by investing in mutual funds from a variety of categories, including debt, equities, hybrid, and others.

Tax Implications:

If the deposit tenure is shorter than five years, the tax on FDs is applied at the individual's current income tax level. If the SIP in equities mutual fund units is sold within a year of purchase, no capital gains tax is due.

Tenure:

You have the freedom to select the FD term of your choice. An FD deposit can be opened for a duration of six months to ten years or more. However, the investment horizon for SIPs should be long-term in order to generate good returns. The compounding factor helps in accumulating wealth and creating a corpus.

SIP vs FD: Which is Better?

SIP and FD are both well-liked investment options in India for those looking to build wealth and get a return on their money. For cautious investors with a low tolerance for risk, FDs are a wise investment decision because they ensure the protection of the funds invested. SIP, on the other hand, appeals to a broad spectrum of investors with various risk tolerances. Although the Systematic Investment Plan has a higher risk profile than FDs, it can provide better returns. You should therefore choose between the two based on your risk tolerance and financial goals.