Difference Between SIP and FD
The world of financial markets has seen a massive change as years have gone by. New financial instruments have come into prominence along with the existing ones. Be it the latest trend of cryptocurrency or mutual funds or safe investment options like Fixed Deposits (FDs) and Government Bonds, the options available are a lot more nowadays as compared to the days gone by.
However, given the variety of options, it is quite common for people who are interested in investing their money to get confused as to which options serves them better. Though Bitcoin has been in the news of late, there has been a trend of potential investors in India looking up the difference between Systematic Investment Plan (SIP) and Time Deposits.
Considering the options offered by both SIPs and FDs, it is never a surprise to find people muddled when it comes to choosing one among the two. Here, in this article we try to clearly differentiate between the two as well as highlight the benefits that each one of them offers to potential investors.
What is Systematic Investment Plan (SIP)?
Systematic Investment Plan (SIP) is merely a mutual fund investment product that allows small investments on a monthly basis in equity and debt instruments. SIPs are the stepping stone for those who are new to the world of mutual funds. Apart from offering good returns, investing in SIPs can help in inculcating the habit of timely investments, which will ultimately result in the individual acquiring a hefty sum of money in a certain period of time.
Benefits Offered by SIPs
Some of the core benefits that investors avail if they invest in SIPs are:
- Investors can invest depending on their needs. Apart from that, one doesn't need to roam about to make the investments and one is also provided with the facility of keeping track of how the investments are doing.
- SIPs do not require the investors to look after the interest rates as the investments are made on a timely basis.
- Tax benefit is another plus offered by SIPs. Investors who invest in SIPs for more than a year can enjoy tax benefits.
- Money can be invested and withdrawn at any time as SIPs are done in open-ended funds.
What is a Fixed Deposit (FD)?
As for fixed deposit (FD), it is a financial instrument that allows investors to put in a lump sum amount for a specific period of time at a fixed rate of interest. It is the safest investment option available to potential investors in the financial market as it guarantees higher returns on the investment made. There are different kinds of FDs that are being offered by banks and non-banking financial companies so investors can go ahead and select the type that suits their needs be it short term or long term goals.
Benefits of Investing in FDs
- First and foremost, the benefit when it comes to FDs is that it assures guaranteed returns on the investments
- The investments are risk-free.
- Offers flexibility to the investors as they can select the amount as well as the time period for which they want to invest.
- Can avail of loans based on the investments made in the FDs.
- In the time of emergencies, FDs can be either closed or the investor can make an overdraft withdrawal.
- You can apply for a car loan against your FD and also become eligible to apply for a credit card using your FD as a security. This is very useful for people who do not have a credit history or have just begun earning.
- You can also get tax benefits if you invest in 5-year Tax Saving FDs
There is no denying the fact that both SIPs and FDs have their own benefits and offers a lot to the investors who choose them. Though they look similar given the benefits that they have to offer, there are quite a lot of differences between the two. The below chart takes a look at the differences:
Parameters | Systematic Investment Plan | Fixed Deposit |
Investment type | In installments | In Lump-sum |
Returns | Can't be guaranteed | Guaranteed |
Nature of return | Capital gain and dividends | Interest |
Risk factor | High | Low |
Liquidity | low/medium | High |
Tax | No tax is charged if the mutual fund units are sold after a year. However, a 15% tax is charged if the units are sold within a year. | Tax is incurred on the basis of the income tax slab under which the investor falls. |
Best suited for | Conservative as well as aggressive investors | Only conservative investors |
Let's Take a Closer Look at The Differences:
- Investment amount - If we look at the investment type available to potential investors with regard to SIPs and FDs, it easy to start investing in both financial instruments. However, considering the rates that they offer, it is comparatively easier when it comes to SIPs as one can start with a small amount and yet have a chance to earn higher returns if the companies in which the investments have been made are doing well.
- Interest rates - Considering the rates of interest offered in SIPs are higher as compared to that of FDs, it does not guarantee a potential investor of great returns. Hence, when one invests in SIPs, it is up to pure luck when it comes to guaranteed returns. While in the case of FDs, one who invests in it is sure to get higher returns irrespective of the sum he/she has invested in the FD.
- Taxes - When it comes to the important topic of tax saving, tax is levied on most FDs on the basis of the income tax slab that the investor falls under. Though, all the FDs charge taxes on the individuals, there is one type of FD called tax saving FD where the investors can claim deductions on investments up to Rs. 1.5 lakh. As in the case of SIPs, though no tax is charged if the mutual funds units are sold after a year, a certain percentage of the tax is levied on the investors.
Though, FDs are the safest option available to investors when it comes to investing their hard money without giving it a second thought, investing in mutual fund SIPs can also be beneficial if the decision to invest is taken after taking all risks into account. With the interest rates on FDs slashed by banks in recent times, both conservative and assertive investors can do prior research on investing in mutual fund SIPs which can result in higher returns on the investments made.
FAQs on SIP and FD
- How can I cancel my SIP anytime?
Yes, your SIP can be terminated at any time. To cancel the SIP, all you have to do is visit the investment platform you use and follow the instructions.
- Can I cancel my SIP at any time?
Yes. The majority of schemes allow you to withdraw your SIP investment at any time. The ELSS, Retirement Savings Fund, and Children Savings Fund are the only exceptions. The lock-in period for ELSS is three years, while it is five years for the other two. You can only withdraw after the required lock-in period has passed because every SIP instalment is viewed as a new investment. Additionally, close-ended funds do not allow withdrawals at any time.
- SIP or FD, which is preferable?
When comparing Systematic Investment Plan to Fixed Deposit, Systematic Investment Plan is a better investment choice, especially when taking into account investment flexibility, the benefit of diversification, tax advantages, and higher returns. For this reason, a systematic investment plan is preferable to a fixed deposit as a means of investment. However, fixed deposits are considered to be a safer, low-risk investment compared to SIP.
- Are SIP Taxes Exempt?
All gains made after a year will be regarded as long-term capital gains and will not be subject to tax if an investor makes SIP investments in equity funds or balanced mutual fund schemes.
- Is it safe to invest in SIP?
SIP is merely a means to invest your money in a mutual fund. SIP is not a type of financial investment product like gold, fixed deposit, or mutual fund. Therefore, the investment scheme in which you are partaking will determine whether a SIP is safe or not.
- Do fixed deposits involve risk?
The Deposit Insurance and Credit Guarantee Corporation (DICGC) scheme insures your investment in a bank up to a maximum of Rs.1 lakh for both principal and interest amounts held in the same capacity and same right. Therefore, your funds would be secure even if the bank where your FD is held declares.
- Is it possible to cancel fixed deposits?
Yes, in the event of an emergency or unforeseen obligations, fixed deposits may be prematurely withdrawn. However, you may have to pay a penalty for breaking your fixed deposit prematurely.
- Is interest earned from fixed deposits taxable?
Yes, if your annual interest income from all of your fixed-term deposits is more than Rs.40,000. The interest is taxable if it is more than Rs.50,000 for senior citizens (60 years of age and older).
- How do I pick an investment strategy?
The best investment options are chosen depending on your wealth goals and requirements. One of the key determinants for investment is the time period for locking in investments, returns, and risk appetite. Before selecting an investment option, whether it is fixed deposits or SIPs think about your personal goals and use the various tools such as FD vs mutual fund calculator available on various platforms. Make sure you do your market research thoroughly or have a financial advisor so you can make the right investments.
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