Home>Fixed Deposit>Fixed Deposit vs SIP

Fixed Deposit vs SIP

Updated on: 19 Jan 2024 | 10 min read

Fixed Deposits (FDs) and Systematic Investment Plans (SIPs) are different yet effective instruments to help you meet your goals. Each comes with its pros and cons. In this blog, we will deconstruct FD Vs SIP to help you understand the benefits of each and how to leverage their strengths to build a robust portfolio

What is a Fixed Deposit?

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

What is a Systematic Investment Plan (SIP)?

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 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 investmentInvestments 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Liquidity potential You can make premature withdrawal by paying a penalty feeSIP offers high liquidity as money can be withdrawn anytime, however you have to bear exit load levied by the Asset Management Company.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.

Features of Fixed Deposits

  • 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.

Features of SIP

  • 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.

What Should You Choose – FD vs SIP

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.

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, understanding the various investment avenues will help.

FAQs

Does the mutual fund have risk?

Mutual funds are not risk-free. Since they are market-linked investment vehicles, their returns fluctuate based on market performance. A mutual fund’s risk factor varies depending on the type of its underlying assets.

Are mutual funds riskier than direct stock investments?

Mutual funds are considered less risky than stocks due to their diversity. Essentially, mutual funds contain a mix of investments managed by experts, so they typically carry a lower risk level than direct investments in stocks.

What happens if we break FDs before maturity?

Premature withdrawals from FDs can incur an interest penalty. Depending on the banks, it can range from 0.5% to 2%.

Can I open a fixed deposit online?

Yes, depending on the bank, you may open a fixed deposit online using the bank’s net banking facility.

What are debt mutual funds?

A debt fund is a mutual fund scheme that invests in fixed-income instruments, including corporate and government bonds, debt securities, etc.

What are the types of mutual funds?

Mutual funds fall mainly into three groups: Debt funds, equity funds, and hybrid funds.

Is FD protected?

Yes, the Deposit Insurance and Guarantee Corporation (DICGC) specialised division of RBI ensures depositors’ amounts up to a maximum of Rs 5 lakh.

Do mutual funds have lock-in periods?

Depending on the type of mutual funds, they may have no lock-in period. However, the Equity-Linked Savings Scheme (ELSS) has a lock-in period of three years.

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. Like a fixed deposit account, the returns on an RD are assured, and the risks involved are relatively low.

What is the difference between PPF and SIP?

Unlike SIP, the 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 extended 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 1961.

Can I grow wealth with FDs?

FDs are an effective instrument for building 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, consider investing in a mix of stocks, equity-based mutual funds via SIPs, and high-yield bonds offering higher interest rates.

Can I cancel my SIP anytime?

Yes, you can cancel your  SIP at any time by visiting the investment platform you use and following the instructions. However, there are a few exceptions to remember:
Schemes with Lock-in Periods
ELSS (Equity Linked Savings Scheme): Has a 3-year lock-in period, meaning you cannot withdraw any funds invested during this time.
Retirement and Children's Savings Funds: Both have a 5-year lock-in period.

Can TDS on FD be avoided?

TDS on FD can be avoided in India if your total interest earned in a financial year is below the threshold limit. This limit is ₹40,000 for individuals below 60 years old and ₹50,000 for senior citizens. So, if you keep your FD interest income below these limits, you won't have to pay any TDS.

fd_banner

Top Banks FD Rates

Understanding Fixed Deposit

wint fd

Earn upto 9.5% p.a. interest by investing in FDs with Wint Wealth.