Fixed Deposits have traditionally served as the bedrock of Indian investment preferences, valued for their reliability. However, the evolution of financial technology has ushered in a wave of alternative investment opportunities. Among these, Mutual Funds stand out, offering the potential for enhanced returns and granting you greater control over your investment portfolios.
A particularly innovative option within the Mutual Funds realm is the Systematic Investment Plan (SIP). SIPs empower investors to begin a Mutual Fund investment journey with a modest initial amount. While SIP is a method of investing in mutual funds, its widespread popularity has led to it being commonly used interchangeably with mutual funds.
Faced with numerous investment choices, it's common to find oneself at a crossroads, particularly when weighing FD vs SIP. As both serve as viable investment mechanisms, the debate around whether SIP is superior to FD is prevalent. Let’s delve into the details to understand the differences between the two.
Differences between FD and SIP
When deciding between Fixed Deposit vs SIP, it's crucial to comprehend how they function and what they offer.
Investment amount
SIPs enable investors to regularly invest a small amount in Mutual Funds. This strategy helps you buy more units when prices are low and fewer units when prices are high, which effectively leverages the benefits of Rupee-cost averaging. SIPs can be used for investing in all mutual funds, but they are typically more popular for investing in equity funds. On the other hand, FDs require you to invest a lump sum at once, earning a fixed interest rate until the deposit matures.
Risk and return
FDs are widely considered safer, offering guaranteed returns. Furthermore, the Deposit Insurance and Credit Guarantee Corporation (DICGC) scheme insures your bank deposits up to Rs. 5 lakh, including both the principal and interest. In contrast, Mutual Funds are market-linked products that have the potential to generate higher returns but are also subject to market fluctuations. Within mutual fund categories, debt mutual funds are generally less risky compared to equity funds. However, one of the benefits of investing via SIP is that it helps mitigate market volatility by allowing you to invest during both highs and lows.
Tenure
SIPs don’t have a fixed investment period. Investors can continue investing for as long as they desire. FDs require you to choose a specific time frame for your investment, ranging from a few days to several years. However, if you want the safety of FDs along with the flexibility of investing regularly for a longer time period, you can consider Recurring Deposits (RDs).
Liquidity
With FDs, early withdrawal is possible, albeit with a penalty fee.You can explore Auto Fixed Deposits, which link your bank account to a Fixed Deposit. This arrangement ensures that funds are available when needed by breaking your FD into small units, thereby providing you with the liquidity of a Savings Account along with the returns of an FD. SIPs offer good liquidity because you can take out money from a mutual fund by redeeming units and receiving the money within two days, but you may have to bear an exit load if one is imposed by the mutual fund house.
FD vs SIP: Which is better?
Choosing between SIP (Systematic Investment Plan) and FD (Fixed Deposit) depends on various factors, including your risk appetite, returns expectations and investment duration.
With an FD, you deposit a lumpsum amount for a fixed period at an agreed-upon interest rate. It is a low-risk investment with guaranteed returns unaffected by market volatility. FDs are a good choice if you're looking for a safe and predictable way to save money over time.
SIPs, however, allow you to invest regularly in Mutual Funds. The returns on SIPs are not fixed; they can be higher or lower depending on the market's performance. This means there's a higher risk than FDs and the potential for higher returns. SIPs are suitable if you are comfortable with some risk and aim for growth in your investment over the long term.
Conclusion
When considering "which is better FD or SIP", the choice depends on personal preference and financial goals. For a stable investment, FD might be more appropriate. But if you're looking for potential growth and can handle the market's ups and downs, then SIP in equity funds could be the way to go.
Also Read: Top 5 reasons to open a Digital Fixed Deposit
FAQs
Q. Is it safe to invest through SIPs?
Investing through SIPs in Mutual Funds involves market risk, but selecting funds wisely and investing over the long term can mitigate risks and lead to substantial growth.
Q. Is SIP better than FD?
Whether SIP is better than FD depends on your investment goals, horizon and risk tolerance. SIPs offer higher potential returns with more risk, while FDs provide stable, but usually lower, returns.
Q. Can I cancel my SIP anytime?
Yes, you can cancel your SIP anytime without penalty, offering flexibility and control over your investment.
Q. Can I withdraw my investment via SIP anytime?
Yes, you can withdraw your investment in mutual funds made through SIPs, fully or partially, depending on your needs and the fund's terms.
Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.
Mutual Fund investments are subject to market risk, read all scheme related documents carefully. Axis Bank Ltd is acting as an AMFI registered MF Distributor (ARN code: ARN-0019). Purchase of Mutual Funds by Axis Bank’s customer is purely voluntary and not linked to availment of any other facility from the Bank. T&C apply.
