SIP vs FD – Which Investment is Better Option for You to Yield More?

9 min read • Updated 27 September 2023
Written by Anshul Gupta
Fixed Deposit Vs SIP

Navigating the investment landscape necessitates understanding options like SIP and FD, which are essential for a secure financial future. The question arises: Is SIP better than FD, or vice versa? Starting early and diversifying is key to leveraging the benefits of compounding and balancing risks.

This blog aims to unravel SIP vs. FD, highlighting their respective advantages and guiding you in harnessing their strengths for a strong portfolio.

Also Read: Experience financial growth with unmatched Bajaj Finance FD Rates

What is a Fixed Deposit?

Offered by banks, post offices and NBFCs, a Fixed Deposit (FD) is a traditional savings scheme where you invest a lump sum for a fixed period. Here are some salient features of fixed deposits:

  • FD is a fixed-income instrument offering assured returns, making it an excellent choice for risk-averse investors. 
  • You will receive a fixed interest rate on your FD during its tenure. 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 on an annual basis.  
  • FD tenure is flexible, ranging from seven days to 10 years. Depending on the tenure, the interest rates range from 2.5% to 8%. 
  • Senior citizens above 60 are eligible to 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 of 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.

Also Read: FD vs RD: Differences Between Fixed Deposits and Recurring Deposits

What is a Systematic Investment Plan (SIP)?

A Systematic Investment Plan (SIP) is a facility offered for disciplined investment in Mutual Funds. SIP facility allows an investor to invest a fixed amount of money at predefined intervals in the selected mutual fund scheme. Here are the key features you need to know about SIPs: 

  • 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 annually. Hence, you need to ensure that your bank account has adequate funds.  
  • SIPs enable you to build an investment habit and reduces the burden of making lump sum investment all at once.  
  • 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 a considerably long period of time, the benefits are magnified by the compounding effect, as returns are subsequently generated on initial principal and pre-accrued return.
  • 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 in mutual funds 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 less 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. 

Also Read: Cumulative FD: A Detailed Guide

Benefits of Investing In An SIP

There are multiple benefits to investing in an SIP, which are as follows:

Investment Consistency & Ease: SIPs encourage constant monthly payments, encouraging disciplined investing. They also provide ease through automatic deductions, making them perfect for people with hectic schedules.

Flexible and Tailored Investing: SIPs offer flexibility in setting investment amount, frequency, and length, appealing to various financial goals with opportunities to start as low as $500 per month in India. Flexible & Tailored Investing.

Rupee Cost Averaging & Affordability: SIPs have been inspired by Dollar Cost Averaging. This encourages the purchase of more units at bargain prices, which helps to average the cost of the investment and make it affordable for many people.

Benefits of Long-Term Compounding: SIPs, which take advantage of the power of compounding to enable regular investments to grow exponentially over time, are excellent for long-term goals.

Diversified and Professional Management: SIPs in mutual funds provide a diversified portfolio and expert management, reducing risk and assisting in making well-informed decisions.

Benefits of Investing in an FD

FDs are one of the most sought-after investing instruments for a reason. Here’s the many benefits that you can reap with a good investment in a Fixed Deposit:

  1. Stable and Assured Returns: FDs provide guaranteed returns at an assured rate, offering transparency and reliability, making them a safe choice for investors seeking stability amid market volatility.
  2. Principal Safety: With their low-risk nature, FDs are ideal for conservative investors to safeguard their principal amount against market fluctuations.
  3. Flexible Tenure & Easy Liquidation: FDs allow investors to choose their investment period, aligning with financial goals, and offer straightforward liquidation options, including online processes for convenience.
  4. Loan Facility & Financial Stability: FDs enable investors to access loans against deposits, enhancing financial security. Senior citizens benefit from higher interest rates, contributing to their financial well-being.
  5. Tax Benefits & Savings Discipline: Qualifying FDs offer tax benefits under Section 80C, promoting savings discipline by locking in funds for a specified duration, thus curbing impulsive spending.

FD vs SIP – The Differences at a Glance 

ParametersFixed Deposit (FD)Systematic Investment Plan (SIP)
Risk profileVery low risk as the correlation with market fluctuations is minimalMedium to high risk as mutual funds are subject to market fluctuations.
Investment methodOne-time lump-sum investment Investments in the form of monthly, quarterly, bi-annual or annual instalments
Liquidity potential You can make premature withdrawal by paying a penalty feeSIP offers high liquidity as money can be withdrawn anytime, however you have to bear exit load levied by the Asset Management Company.  
ReturnsAssured returns. DICGC offers insurance of upto Rs.5 lakhs (principal + interest earned) on Fixed Deposits.No guarantee of returns
Type of  returnsInterest incomeDividends and capital appreciation
Tax applied The interest earned per fiscal year must be added to income and taxed according to the tax slab. TDS will be applicable if total interest income is more than Rs. 40,000. Capital Gains on Mutual Funds are taxed according to the holding period and type of funds (equity or debt). Dividends are taxed according to the applicable tax-slab of the investor.
Tax deductions under the old tax regime You can get a tax deduction of up to Rs. 1.5 lakhs under Section 80C of the Income Tax Act on a five-year tax-saver fixed depositYou can get a tax deduction of up to Rs. 1.5 lakhs under Section 80C of the Income Tax Act on an ELSS SIP.

Also Read: Step-Up SIP: What Is It and How Does It Work?

Final Thoughts

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, developing an understanding of the various investment avenues will help.

FAQs

What is the difference between RD and FD?

Recurring Deposit (RD) is a savings scheme offered by banks and post offices, in which a fixed amount is deducted from your savings bank account every month for a fixed tenure of 6 months to 10 years. Depositors earn higher interest than the savings account, making it an option worth considering. Unlike FDs, it allows you to make investments in instalments. Similar to a fixed deposit account, the returns on an RD are assured and risks involved are relatively low.

What is the difference between PPF and SIP?

Unlike SIP, Public Provident Fund (PPF) has a lock-in period of 15 years. One of the few instruments to enjoy the exempt-exempt-exempt status, PPF offers tax deductions on investments up to Rs 1.5 lakhs per year. In addition, PPF currently earns an interest of 7.1%.

SIPs, on the other hand, are market-linked and, therefore riskier than PPFs. However, the money you invest in SIPs is not locked-in for an extensive period. Therefore, SIPs provide higher liquidity compared to PPFs.

What is the minimum investment I can make in a SIP?

You can start a SIP with a minimum investment of Rs. 100 to Rs. 1,000 per month, depending upon the specific fund.

Are there any tax benefits for FDs and SIPs?

You can get a tax deduction of up to INR 1.5 lakh for five-year tax-saver FDs and ELSS SIPs, under Section 80C of the Income Tax Act of 1961.

Can I grow wealth with FDs?

FDs are an effective instrument to build savings via the interest earned. However, there is limited scope for wealth creation because of the fixed nature of interest rates. Moreover, the interests are also taxed. To accelerate your wealth creation journey, you may consider investing in a mix of stocks, equity-based mutual funds via SIPs, and high-yield bonds, which offer higher interest rates.

Is it safe to invest in SIP?

Investing in SIPs is generally considered safe, but it carries market risks as it usually involves investment in mutual funds, so assessing your risk tolerance and choosing funds wisely is essential.

Can I cancel my SIP anytime?

Yes, you can cancel your SIP anytime, but reviewing the fund’s terms and conditions regarding cancellations is advisable.

Is SIP better than FD?

Whether SIP is better than FD depends on individual financial goals, risk tolerance, and investment horizon; SIPs can offer higher returns with higher risk, while FDs provide stable, guaranteed returns with lower risk.

Was this helpful?

Anshul Gupta

Co-Founder
IIT Roorkee Alumnus and CFA with experience of structuring debt products worth more than 15000Cr for institutional and retail investors.

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