Fixed Deposit vs SIP

Fixed Deposits are like a haven for your savings, where you park a lump sum for a set period (days to years) at a fixed interest rate, earning a guaranteed return regardless of market swings. Different banks offer varying rates based on how long you invest and how much you deposit.FDs continue to appeal to many due to their very low-risk nature and assurance of a return apart from this, each depositor in a bank is insured up to a maximum of Rs. 5,00,000 for both principal and interest amount held by him/he

A mutual fund is an investment instrument comprising a portfolio of assets like stocks, bonds, gold, and other market-linked securities. A SIP is a facility offered for disciplined investment in mutual funds. It allows an investor to invest a fixed amount of money at predefined intervals in the selected mutual fund scheme.

• FD offers assured returns in the form of fixed interest, making it an excellent choice for risk-averse investors. On completion of the term, the principal investment is returned to you.
• Based on interest payout frequency, fixed deposits are categorised into cumulative and non-cumulative FDs. In a cumulative FD, the investor gets interest as a lump sum at the end of maturity. In a non-cumulative FD, interest is periodically paid to the investor, i.e. monthly, quarterly, bi-annually or annually.
• FD tenure is flexible, ranging from seven days to 10 years. The interest rates range from 3% to 8%, depending on the tenure.
• Senior citizens above 60 can receive a slightly higher interest rate.
• Investors can decide on the FD investment tenure based on their liquidity needs.
• Tax deductions are allowed on investments up to Rs.1.5 lakh in tax-saving FDs under Section 80C of the Income Tax Act 1961. These FDs have a tenure of 5 years.
• The interest earned on a fixed deposit is not tax-free and is taxed according to the investor’s income-tax bracket. In addition to this, TDS will be applicable on interest income from FDs.
• FDs can be used as collateral to secure a loan.

• SIP allows you to consistently invest small amounts into a mutual fund. The payments are auto-debited from your savings bank account on a monthly, quarterly, bi-annually, or annual. Hence, you need to ensure that your bank account has adequate funds.
• SIPs enable you to build an investment habit and simultaneously reduce the burden of making lump-sum investments.
• Unlike an FD, mutual funds offer higher return potential in the long term. So they can be used to build wealth over a longer timeframe.
• When you invest regularly through SIP for considerably long periods, the returns are subsequently generated on initial principal and pre-accrued return. Hence, benefits are magnified by the compounding effect.
• One can choose to invest in the SIP mode across a wide range of mutual funds like equity mutual funds, hybrid, and debt mutual funds, based on your risk appetite and financial goals.
• Investment via SIPs will allow you to take advantage of rupee-cost averaging. As you invest a constant amount through SIPs, you can buy more MF units when the price is low and fewer units when the price is high. This brings down the average cost per unit.
• You can start investing as less as Rs. 100 per month, thus lowering the pressure to invest a lump sum.

FDs represent an investment option where you make a one-time lump sum deposit at a fixed interest rate for a term. On the other hand, SIPs are more of an investment are monthly installments in mutual funds. It's important to understand that each option has its features and benefits catering to different investors and their objectives.

Factors to consider when deciding:

• Risk Tolerance: FDs may be more suitable if you prefer investments focused on preserving capital. However, if you are comfortable with moderate levels of risk for higher returns, SIPs could be a better choice.
• Investment Amount: FDs work well for lump sum deposits, while SIPs are designed for investments over time.
• Investment Goals: If your main priority is capital preservation with returns, FDs align with those objectives. On the other hand, if you have goals and are aiming for higher returns through strategic investments, SIPs might be more suitable.
• Investment Tenure: FDs have predefined terms that must be followed until maturity, while SIPs offer flexibility by allowing withdrawals based on performance without any duration constraints.

Ultimately, the best choice depends on your situation risk tolerance level and long term investment goals.

You can consider investing in both FDs and SIPs to build a consistent investment habit over the long term.

FD is an evergreen investment for those seeking low-risk investments with assured returns.

On the other hand, SIP in mutual funds comes with relatively higher risks and offers higher return potential over the long timeframe. Disciplined investing using this mode can help you build a significant corpus.

Collectively, these tools help accelerate your wealth creation objectives, enabling you to accomplish your life goals promptly. Even if you haven’t already started your investment journey, understanding the various investment avenues will help.