What is SIP?
A systematic investment plan or SIP is an investment vehicle which allows you to invest a fixed sum of money on a regular basis in a mutual fund scheme.
Benefits of SIP
- Since investments in SIP are spread out over a long period of time, it helps in averaging the cost of your investment as opposed to a lump sum invested at a single point in time.
- SIP investment is very flexible as investments can be made at frequencies (monthly, bi-monthly, etc.) you prefer. Also, investors can increase or decrease the amount of investment as per their requirement.
- SIPs are appealing to the masses because of their affordability as you can start investing in SIP with as low as Rs 500 each month.
- A SIP negates the need of timing the markets. Since you are investing regularly, you are able to capture both, the market highs and lows.
- SIP mutual funds are a smart and disciplined way of saving money and meeting your financial goals.
What is FD?
Fixed deposit is a financial instrument provided by banks and companies. The investor gets a fixed rate of interest for a given time period. Your money is locked in until the maturity of the fixed deposit which could range from 7 days to 10 years.
Benefits of FD
- A fixed deposit is suitable for conservative investors with a low appetite for risk as the rate of return is assured and known in advance.
- It offers depositors flexibility with regard to amount and time period of investment.
- In case of an emergency, money deposited in a FD can be withdrawn at a nominal charge or you can even avail an overdraft facility on the deposit.
- Investing in tax-saving FDs for 5 years, entails various tax benefits.
Difference between SIP and FDs
| Parameters | SIP | Fixed deposit |
| Suitability | All types of investors. | Conservative investors with low risk appetite. |
| Liquidity | High | Low to medium |
| Returns | Vary with the market. | Predetermined fixed rate of return |
| Tenure | Long-term investment | Both short-term and long-term investment |
| Taxation | Equity funds and debt funds are taxed differently. However, capital gains up to Rs 1 lakh in case of investments in equity and equity funds are tax-free per financial year. | Tax is levied on the basis of the investors tax slab. |
Investors can choose between SIP and Fixed Deposit based on their risk appetite and other factors mentioned in the table above. If you want to invest for a longer period of time, SIP has been proved to effectively beat inflation while growing your wealth. On the other hand, over a longer time period, FDs are wealth destroyers due to the low rate of interest. SIP is a simple and convenient method of asset building. You can invest in a SIP online either through your bank account or by directly logging on the mutual fund website.
