As you plan for a financially secure and a prosperous future, the question that arises is how to grow and safeguard your money. The answer lies in what you are planning to achieve. Whether it's a comfortable retirement, building a safety net, or attaining specific financial goals.
Some of the basic investment tools that you can use to grow your funds are the
Systematic Investment Plans in Mutual Funds (SIPs) and Fixed Deposits (FDs). Each tool and method provides unique benefits and multiple ways to diversify your portfolio and build wealth.
In this blog, let’s understand FDs and SIPs in mutual funds in depth so that you can determine which one aligns better with your goals.
Understanding FD Investment
Fixed Deposit is a savings option offered by banks, where you invest a specific sum of money for a fixed period. The range can start from as short as 7 days to as long as 10 years.
When you open an FD account, the financial institution guarantees a predetermined interest rate on your deposit. This rate remains unaffected by fluctuations in the market and you can earn stable returns even if interest rates change after you start the investment.
A tax-saving FD with a lock-in period of 5 years or more can help you get tax benefits as well. An FD preserves your capital and offers steady and risk-free returns.
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Understanding an SIP Investment
A Systematic Investment Plan (SIP) is a flexible yet disciplined way of investing in mutual funds. Once you start a SIP, you can contribute a fixed amount at regular intervals—such as monthly or quarterly—into equity or debt mutual fund schemes.
This method is suitable for beginners in the investment world or those who prefer not to commit a large lump sum at once. SIPs are goal-oriented and encourage the habit of saving consistently.
Over time, they can help you build wealth through compounding while staying aligned with your financial objectives. If you do an SIP in ELSS for 3 years, you are eligible to earn tax benefits.
Fixed Deposits VS Systematic Investment Plans
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Differences Between Fixed Deposits and Systematic Investment Plans
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Criteria
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Fixed Deposits
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Systematic Investment Plans
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Nature of Investment
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One-time lump sum investment.
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Regular investments made in small, periodic installments.
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Nature of Returns
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Returns are fixed and guaranteed.
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Returns are market-linked and subject to fluctuations, not guaranteed.
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Return Type
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Interest earned on the deposited amount.
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Earnings come from dividends and capital gains on the invested amount.
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Ideal for
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Suitable for conservative investors with a low-risk appetite.
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Best for aggressive investors willing to take medium to high risks.
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Liquidity
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It comes with a lock-in period; early withdrawals may incur a penalty.
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Funds are generally liquid and can be withdrawn anytime with a small exit fee that may/may not be applicable
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Tenure
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Provides flexible tenures from 7 days to 10 years.
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Requires a substantial duration for desirable returns, usually long-term investments.
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Taxation
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Tax is charged based on the investor’s income tax slab.
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Tax depends on the holding period: long-term capital gains tax for investments held over a year; short-term​​​​​​​
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Which is a better investment: SIP or FD?
FDs are a type of investment tool and SIP is an investment method where you contribute a fixed amount regularly over time. Comparing the two directly may not be entirely fair, as they serve different purposes. SIPs are associated with mutual funds, and the terms are sometimes used interchangeably.
Here are a few points you can look at if you are confused between selecting an FD or an SIP:
- If you are a risk-averse investor who values the safety of your money over high returns, an FD is a better choice. If you are willing to take moderate to high risks for higher returns, an SIP might be more suitable.
- For those who prefer to invest a lump sum amount, FDs are the way to go. On the other hand, if you prefer investing smaller amounts at regular intervals, SIPs are a better fit.
- If your goal is to preserve your capital and you don’t mind settling for lower but guaranteed returns, an FD aligns with your needs. But if you want to pursue specific financial goals with the potential for higher returns, SIPs are a more effective option.
- Fixed Deposits work well if you have an investment tenure in mind. In contrast, SIPs offer flexibility and allow you to withdraw funds when your investment yields desirable returns.
Wrapping Up
Both SIPs and FDs are excellent investment options that can help you work toward your financial goals. SIPs come with higher returns, rupee cost averaging, and provide power of compounding while FDs provide stability, secure returns, and the assurance of capital preservation.
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