SIP Vs FD

What is SIP(Systematic Investment Plan)?

One of the ways to invest in mutual funds is through a SIP (Systematic Investment Plan). Individuals can invest a set amount of money in any mutual fund plan at regular intervals — weekly, monthly, quarterly, and so on – through SIP. The funds are automatically deducted from the investor’s bank account on a certain date and directed to the mutual fund scheme of the investor’s choice. In most cases, Systematic Investment Plans (SIPs) are used. The systematic investment plan (SIP) is a popular choice among mutual fund investors. It enables individuals to invest in a disciplined manner without having to worry about market volatility or market timing. Due to rupee cost averaging, SIPs are also less affected by market volatility.

Systematic Investment Plans (SIPs) are a type of investment plan that follows a set SIP is a great way for first-time investors to get into equity funds. This allows investors to spread their bets out over time and park their cash at various market levels. Furthermore, by investing a small amount of money over time, investors can build long-term wealth. As a result, SIP is the most effective method for developing the habit of saving and investing on a regular basis. Aside from that, when investors start early and have a longer investing horizon, they can benefit from the power of compounding. Furthermore, investing in tax-saving plans, such as ELSS funds, through a systematic investment plan (SIP) qualifies for a tax exemption of up to INR 1.5 lakhs under Section 80C.

What is FD(Fixed Deposit)?

A fixed deposit is a type of financial instrument offered by banks and non-banking financial institutions. An investor invests a lump sum amount for a set length of time at a fixed interest rate. It is one of the safest investment options on the market because it guarantees a higher return on the investor’s investment. Different types of fixed deposits are available from non-banking financial companies and banks, depending on the needs of investors for short- and long-term goals. Fixed deposits have a number of advantages. The best thing about fixed deposits is that you can count on a consistent return on your money. Fixed deposit investments include paying some fees.

Fixed deposits offer flexibility because investors can select the time period and amount that best suits their needs. You may be eligible for a loan based on your fixed deposit investment. In the event of an emergency, an investor can immediately close the FD and withdraw the funds via overdraft. If you invest in tax-saving fixed deposits for five years, you will be entitled to a variety of tax benefits. Fixed deposits are a safe way to invest. Investors can choose from a variety of Fixed Deposit Schemes based on their short-term or long-term objectives. Fixed deposits also provide guaranteed returns on investment.

Benefits of investing in SIP

• Simple and Convenient: SIP investing is systematic, as the name implies. It allows people to invest a small amount of money on a monthly basis without having to worry about it. By submitting a one-time instruction to the bank, investors can set up an auto-debit mandate. As a result, a specific sum is deducted on a set day and routed to the investor’s SIP fund.

• The Power of Compounding: Investors should begin investing early and consistently in order to build wealth. With a longer investment horizon, compounding becomes more powerful. SIP allows investors to begin investing with as little as INR 500 per month. As a result, a small amount invested on a regular basis might grow into a substantial sum. This comprises not only a person’s investment but also the compounded returns over time.

• Rupee Cost Averaging: When you invest in SIPs, you don’t have to worry about market timing. A person only needs to set aside a set amount of money for a set period of time on a regular basis. Even if the amount remains constant, when the price is low, investors purchase more units (i.e. when markets are down). Similarly, when the price is high, investors buy fewer units (i.e. when the markets are rising). As a result, the average cost per unit is lowered.

Benefits of investing in FD

• Fixed Returns: Unlike stock market investments, FD interest rates do not change with market movements. Even if the stock market is performing poorly, fixed deposit holders may rest assured that their money is safe. As a result, investors may rest assured that their fixed deposit investment is safe. At the end of the term, they will get the principal amount as well as the FD interest rate payout.

• Loan Against Fixed Deposit: Fixed deposits can also be used to get bank loans. In other words, if a person has a fixed deposit, he or she can take out a loan against it. Typically, lending institutions will lend up to 90% of the amount of the fixed deposit. The percentage may, however, differ from one bank to another. Even if the loan is secured by the FD, the individual continues to earn interest on the FD. It’s vital to remember that the loan term cannot exceed the term of the fixed deposit.

• Tax Benefit: Investing in tax-saving FD schemes qualifies investors for tax benefits under Section 80C of the Income Tax Act of 1961. In a financial year, the maximum deduction that can be claimed under this clause is INR 1.5 lakhs.  However, such fixed deposits come with a lock-in period of 5 years.

Comparing SIP Vs FD

• Returns: The returns in a SIP are volatile. The SIP returns are solely reliant on the stock market’s success. If the stock market does well, the mutual fund SIP will do well as well. SIPs, on the other hand, tend to outperform fixed deposits during bull markets.

The returns on a Fixed Deposit are predetermined. The earnings on a fixed deposit investment are guaranteed payments for the duration of the investment. The rate of return on a fixed deposit is determined by the bank that the individual selects.

• Risk: In the market, there is a statement that says, “Mutual fund investments are subject to market risk.” Because every mutual fund investment is subject to market risk, this is the case. In addition, the risk is determined by the type of SIP fund selected. As a result, SIPs are susceptible to market fluctuations.

In an FD, the risk is rather low. The depositor will continue to receive both the principal and the interest payments. As a result, market fluctuations have no impact on fixed deposits. A bank, on the other hand, can fail. In this situation, the Deposit Insurance and Credit Guarantee Scheme of India has covered FDs up to INR 1 lakh.

• Liquidity: In comparison to FDs, SIP investments are more liquid. In the case of a SIP, the investor can withdraw their money at any moment. The payment is credited in T+3 days for equities mutual funds. The amount is credited to the investor’s bank account in T+2 days for debt funds (fixed-income funds). SIP can also be stopped at any time without incurring any fees.

Because fixed deposits have a lock-in term, they are difficult to redeem. To obtain the money, one must wait until the end of the term. Premature withdrawals, on the other hand, are permitted with a penalty cost.

• Taxation: Short-term capital gains (STCG) and long-term capital gains (LTCG) apply to mutual fund SIP investments (LTCG). Short-term capital gains on equity mutual funds are taxed at a fixed rate of 15%. Long-term capital gains, on the other hand, are taxed at 10% on incomes over $1 lakh. LTCG, on the other hand, is taxed at 20% after indexation in debt funds, and STCG is taxed at the individual income tax slab rate. Furthermore, SIP investing in a tax-saving scheme, such as ELSS funds (Equity Linked Savings Scheme), allows a tax exemption up to INR 1.5 lakhs in a financial year under Section 80C. 

Fixed deposits are taxed at the depositor’s marginal tax rate. In addition, interest received on FDs over INR 10,000 in a financial year is subject to a 10% TDS. You can also invest in a tax-saving FD to get a tax benefit of up to INR 1.5 lakhs under Section 80C.

Which one to choose?

Both SIP and FD Fixed Deposits are popular investment options in India for those looking to build wealth over time. FDs are a safe investment option for investors who want to keep their money safe. SIPs, on the other hand, can be advantageous when all risk considerations are considered. SIPs also cater to a wide group of investors with varying risk profiles.