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Fixed deposits, or FDs, are the most traditional and trusted investment instruments used by Indians. However, with the advancement in fintech, investors are seeking alternative investment options like mutual funds that have a scope of better returns and give more control to the investor over their portfolio.
Another relatively new investment avenue you can consider is a systematic investment plan or SIP, which allows you to start investing in mutual funds even with a small amount.
With so many options available, you may get confused, especially between FDs and SIPs. Since both are investment tools, many wonder if SIP is better than FD.
Here is a detailed analysis for you to decide which of the two investment options is better for you.
What is an FD Investment?
A fixed deposit is a lump sum investment account you open with a bank or a Non-Banking Financial Company (NBFC). You can invest a fixed amount in an FD for a duration between 7 days and 10 years with the financial institution, depending on your financial goals.
The bank or the NBFC pays you a fixed rate of interest on your investment, decided when opening the FD account. The FD returns are unaffected by market volatility, and even if the bank or the NBFC changes the FD interest rates after opening your FD account, you will receive the pre-decided rate of return.
Investing in a tax-saving* fixed deposit for 5 years or more can bring you tax* benefits, further adding to the FD benefits. The primary goal of a fixed deposit is capital preservation.
What is a SIP Investment?
A Systematic investment plan is essentially an investment process that allows you to invest a fixed sum of money at regular intervals into equity or debt mutual fund schemes. SIP investments are ideal for people who are new to market investments and do not want to invest a significant lump sum amount at once.
SIPs are goal-oriented investments and help develop a habit of saving small amounts in a disciplined and timely manner. Moreover, you can enjoy tax benefits on your SIP investments if you invest for a duration of a year or more.
Difference between FD and SIP
Parameters |
Fixed Deposits |
Systematic Investment Plans |
Nature of Investment |
Lump sum investment |
Investment in regular instalments |
Nature of Return |
Guaranteed1 returns |
Returns are market-linked2 and not guaranteed1 |
Return Type |
Interest on the invested amount |
Dividend and capital gains on the invested amount |
Ideal Investment Options For |
Conservative investors with a low-risk appetite |
Aggressive investors with a medium to high risk-appetite |
Liquidity |
FDs have a lock-in period. If you withdraw funds before the lock-in period ends, you may be charged with a penalty. |
In most cases, you can withdraw funds anytime you want without affecting their market value or paying any penalty on withdrawal. There may be exit fees applicable here. |
Tenure |
Flexible tenure |
You must invest for a substantial time to earn desirable returns |
Taxation |
Tax* charged depends on the investor’s income tax* slab |
If mutual fund units are sold after the completion of a year, the tax* is charged according to the long-term capital gains tax. Selling the units before completing the one-year duration will attract a higher short-term capital gain tax. |
Is SIP Better than FD?
First of all, FDs are investment tools whereas SIP is an investment process — an investment done in equal parts and regular intervals. Comparing these two may be a little unfair. But it is a fact that many people often relate SIPs with mutual funds and use the term almost interchangeably.
Both SIPs and FDs have their own unique features and benefits, and you can choose the option that best suits your investment needs.
Here are some points you can consider to make an informed decision between the two options:
If you are a conservative investor who does not like risking his hard-earned money, you can opt for an FD. On the other hand, aggressive investors who desire higher returns and are ready to take moderate to high amounts of risk on their investment can opt for a SIP.
If you want to invest a lump sum amount, you can invest in an FD. If you want to start investing small amounts of money at regular intervals and do not want to make a large investment, you can invest in a SIP.
If your primary investment goal is capital preservation and you do not expect high returns from it, you can invest in an FD. If you want to make goal-oriented investments which would fetch you higher returns, invest in a SIP.
If you have a fixed investment term in mind, you can invest in a fixed deposit scheme. Alternatively, if you are not sure of the investment duration and may want to withdraw funds at any time your investment is giving suitable returns, you can invest in SIPs.
Secure your Future with Tata AIA Life Insurance Plans
Along with investment instruments like FDs and SIPs, you may also add insurance plans to your portfolio to enhance your financial security. You may invest in life insurance policies to protect your loved ones against financial uncertainties, even in your absence.
With our Tata AIA policy for life insurance, you can enjoy facilities like express claim settlement and flexible premium payment terms. Not only is buying life insurance online straightforward with us, but you can also choose from a wide range of insurance riders# to enhance the policy coverage. With an additional premium amount, add-on covers, like critical illness coverage and waiver of premium benefits, bring a lot of value to the base policy.
Wrapping Up
Fixed deposits and systematic investment plans are both investment tools that help you generate returns on your investment. Both these investment avenues have their unique features and benefits and are suitable for different investment needs.
You can choose the investment option that best suits your financial goals. Adding a life insurance policy to your investment basket provides financial security to you and your loved ones in unfortunate and unfavourable insured events.
