SIP vs FD

Let’s start by answering the question “what is SIP investment?”. In an SIP plan, you invest small amounts regularly in mutual funds with the aim to create long term wealth. Despite including market-related risks, they give you the chance to earn higher returns compared to traditional deposits.

SIPs contribute towards making you a disciplined investor. You invest a fixed amount every month and eventually your wealth grows through the power of compounding. Cost averaging also helps you derive benefits from the market highs and lows.

SIP is usually a long-term investment plan suitable for long-term future financial goals. These include planning for your retirement, saving for higher education or accumulating wealth to buy a house.

Now, we’ll move on to discuss “what is FD?”. In a Fixed Deposit (FD), you park a lump sum in the bank for a fixed period. Eventually, your wealth grows through the power of compounding and you earn guaranteed returns.

Public sector banks usually offer interest rates ranging from 3% to 6.5% per annum. On the other hand, private sector banks provide more competitive rates ranging between 4% and 7.5% per annum.

You can choose to invest in an FD if you have short-term financial goals in mind. These include building an emergency fund, saving for an expensive product like a laptop, vacation, saving for home down payment etc.

Let’s understand how an FD works with an example

• You deposit a lump sum amount (principal) into a bank, NBFC, or post office for 1 year. Let’s assume that you invest amount is ₹1,00,000 in a bank.
• The principal starts to grow at a fixed interest rate. This rate is higher for longer tenure. Suppose the rate of interest is 6% p.a.
• The interest is calculated based on the principal, tenure, and rate ( Formula: Principal x Interest Rate x Time). Thus, the interest accumulated here would be 1,00,000 x 6% x 1= ₹ 6000
• After maturity, the bank returns the principal along with the interest. Hence, the final amount is 1,00,000 + 6000 = ₹1,06,000
• If you want to withdraw money before maturity, the bank will charge you a fee or penalty.

Knowing the difference between SIP and FD is important to decide which one is suitable for you. You should have clarity about the primary features, benefits, and drawbacks to make a prudent choice. We’ve listed the key differences between the two below:

You can decide which one is the best investment plan for you by assessing your risk appetite, return expectations, and investment tenure. If you’re a risk tolerant investor, who wants to invest regularly, you can choose SIP. Being a market-linked instrument, the risk is higher but there’s also the potential for higher returns.

Fixed Deposits offer guaranteed returns on maturity. The investment tenure is predetermined and the interest rate is decided at the time of investment. Hence, you can predict the amount you’ll get after maturity. If you’re a risk averse investor looking for a safe investment option, FDs are suitable for you.

While they’re both popular types of investment plans in India,they’re meant for different types of investors. If you’re someone who prefers spreading the investment amount over time, SIP is a suitable choice. This can help you achieve your long-term goals. On the other hand, if you want to invest a lump-sum amount to fulfill a short-term goal, FD might be a better option.

If you’re wondering, “Is SIP better than FD?”, you should know that it depends on several factors. These include, your financial situation, risk appetite, financial goals, preferred tenure, expected returns, etc. Each investment comes with its unique features. Let’s discuss each of them to help you decide which is a better option:

The returns in SIP are market-linked and the rate of interest can be quite high. So, the returns are potentially high but they’re not guaranteed. However, in FDs, you deposit a certain amount for a fixed period. The rate of interest is lower and the amount you get as return after maturity is guaranteed. Now let’s explain how returns work is SIP vs FD:

Assumptions to calculate SIP returns

Monthly investment: ₹10,000

Tenure: 5 years

Interest rate: 12%

Now, if we calculate the returns using the Axis Max Life SIP calculator,the return will be approx ₹8.11 lakhs.

Assumptions to calculate FD returns

Lump sum investment: ₹1,00,000

Tenure: 5 years

Interest rate: 6%

When we calculate the returns using the Axis Max Life FD calculator, we get approx ₹1.3 lakhs.

Thus, you can see that the returns are typically lower in the case of FD when compared to SIP for the same time frame. However, they’re stable and guaranteed. On the other hand, SIP can give much higher returns but is also risky.

SIP and FD are popular investment plans which come with their own advantages and shortcomings. They serve different purposes and are suitable for different types of investors. The most common advantages and disadvantages of both investments are given below:

The best time to start a Systematic Investment Plan is as early as possible. Ideally, you should start your SIP from your first job onwards to build wealth. But more importantly, start it when you have a long-term goal and steady income.

As we have mentioned earlier, investing in SIP and FD depends on your unique financial goals, risk appetite, investment tenure, etc. When you want to invest for a short-term goal and are looking to earn stable returns, FD is an appropriate choice. The returns are not market-linked, so the risk is low. It’s suitable for you if you’re a conservative investor.

When you’re aiming to accumulate wealth for long-term financial goals, SIP can be a better option. Though the returns depend on market volatility, they’re potentially higher. The rate of interest is also higher, which helps you earn higher returns. It’s suitable for you if you’re a risk tolerant investor aiming to grow wealth.