In today’s fast-paced world, abbreviations like LOL and ASAP are part of everyday conversations, but do you know what FD and SIP stand for? Fixed Deposits (FD) and Systematic Investment Plans (SIP) are two popular investment options, yet many investors remain unclear about their meanings, benefits, and differences. Understanding the difference between FD and SIP is crucial for making informed financial decisions.
While FDs offer stable, fixed returns, SIPs provide the potential for higher growth through market-linked investments. Curious to know which one aligns with your wealth-building goals? Let’s dive into the difference between FD and SIP and discover how you can leverage them to grow your money smarter.
What is FD?
FD stands for Fixed Deposits. It is a financial product facilitated by banks, non-banking financial institutions, and post offices. Traditionally, most Indians have preferred to invest their money in fixed deposits as there were no better options available.
It is commonly viewed as a safe approach to growing wealth in the long run, as it is not involved in any kind of market fluctuations. In this scheme, a person deposits a lump sum amount of money for a selected period at a fixed interest rate (ranging from 6 to 10%). For instance, if you invest Rs 10,000 in 2023 for 5 years at an interest rate of 7%, you will get Rs 14,148 in 2028.
During the tenure, there are restrictions on accessing the amount; however, during an unavoidable emergency one can take out the money with some penalty being charged.
Benefits of Fixed Deposit
Listed below are some of the renowned benefits of FD which led traditional investors to opt for this monetary scheme for years. Let’s explore them one by one.
1. Low Risk
Under the investment spectrum, FD ranks the least risky among multiple available options. The reason for this is that FDs are not linked to any sort of market volatility. Most of the investments under this scheme are covered by government insurance to a limit of INR 5 Lakh for each account holder.
2. Assurance of Returns
The most liked aspect of this monetary scheme is that it guarantees the security of the principal amount and the promise of returns from its investments. There are very few chances of fraud or default, unlike other schemes.
3. Flexible Tenure
Another important benefit of this scheme is that it comes with multiple tenure options, which makes it suitable for both the long-term and short-term goals. In India, the tenure for a fixed deposit can range from 7 days to 10 years.
Disadvantages of FD
Listed below are a few disadvantages of FDs due to which modern-day high-risk-taking investors do not include FDs in their wealth-building strategy. Dive into the list to know more about them:
1. Lower Returns
While comparing the returns earned through FDs with other sought-after investment schemes, you will find that the former offers lower returns. If you calculate wisely, your inflation-adjusted return will almost seem negligible. Additionally, rural and urban inflation are different which leads investors to feel varying impacts.
2. Tax on Interest Earned
Returns earned from fixed deposits are taxable. It gets added up to your total income and taxed at the slab rate which is applicable to your total income.
Moreover, banks deduct tax at source (also known by the term TDS) while crediting your FD interest every year. They do so only if your interest in FD is more than 40000 in a single year and 50000 in a senior citizen case.
3. Liquidity Restrictions
The bank also knows that the principal money belongs to you and therefore they allow premature withdrawals of funds, but they charge some form of penalty.
What is SIP?
SIP stands for Systematic Investment Plan. Investing in mutual funds through SIP is one of the most practical and disciplined approaches to wealth creation in the long run. This investment method allows investors to deposit a certain predetermined amount on a monthly basis into a mutual fund scheme. Moreover, it helps investors cultivate a habit of disciplined investing while allowing them to build wealth.
Furthermore, with the rapid rise of technology in the last decade, investing in mutual funds has become effortless, you just need to open a demat account on an AMFI-registered mutual fund distributor and you are good to go.
As an investor, you just need to pick a good mutual fund, select an investment amount, and automate the investment by giving them the required permission to auto-debit on a specified date every month. Once you have done so, you need to review your portfolio on a regular basis (like every seventh day or fifteenth day) and rebalance it when needed. If you don’t have enough knowledge to pick the right funds that perform well in the future or if you are already investing and need help rebalancing your portfolio, Wealth Redefine is just a call away.
Overall, SIP in mutual funds is ideal for investors seeking budget-friendly investment methods. It allows them to start their investment journey by depositing as little as Rs 500 every month. Also, this feature of SIP makes it a more convenient option than lump-sum investing, like FD.
Advantages of SIP
Here are a few of the most common benefits of SIP which makes them an impressive form of investment. Explore the detailed list of benefits below:
1. Rupee cost averaging:
By investing in SIP for a long period, investors benefit from getting the average cost for all the mutual fund units allotted to them. Moreover, with the rupee cost-averaging benefit in hand, investors are not required to time the market. They just need to remain invested for a longer period.
With a fixed amount invested every month, SIP helps investors reap the benefits through cost averaging. It means that more units are allotted to investors when the market is down and fewer units when it is higher.
2. Cost-effective method:
SIP is regarded as one of the most practical ways of investment as it is a budget-friendly investment option and one can start with as low as Rs 100.
Additionally, this disciplined approach to investing allows investors to take off the burden of timing the market. Also, this helps in reducing the timing risk associated with self-investing and investing in stocks.
3. Systematic Investment Approach:
Starting out investment in SIP from a younger age will help you in developing a habit of discipline towards managing your finances. Even if you start small, which feels like a waste of effort at first will help you to spend wisely and protect yourself from the marketing campaigns of numerous brands.
More importantly, this investment method helps investors build long-term focus toward their financial goals.
4. Compounding Benefits:
The most important benefit that lures investors towards starting an SIP is because of its power of compounding. It helps investors’ money to grow exponentially rather than linearly. It happens when the interest earned on your principal amount gets reinvested to earn more return year over year.
Disadvantages of SIP
Everything comes with its pros and cons, and so is SIP. here is the list of disadvantages of SIP that you should be knowledgeable about for a safe and sound investment decision. Dive into the list below:
1. Market Associated Risk
SIPs are primarily linked to the equity market, they are prone to market volatility and associated risks. If the market does not perform well, your returns will really suffer.
2. Not good for the short term
SIPs in mutual funds work best for long-term financial goals. Remember, compounding benefits. If you have short-term goals, SIPs may not give the desired returns due to market volatility.
3. No guaranteed returns
In contrast to FDs, SIPs do not provide guaranteed returns. This is the reason you might have heard this in the television advertisement or read it in some newspaper – Mutual funds are subject to market risks, please read all related documents carefully before investing.
Difference between FD and SIP
While FD and SIP serve different motives, they both cater to specified financial needs. The decision between the two depends solely on the individual’s:
- Risk Appetite
- Financial Goals, and
- Investment Duration
Let’s explore the difference between FD and SIP in a detailed manner by comparing them based on different aspects:
1. Type of Investment:
While investing in an FD, you need to deposit a lump-sum amount, which gets locked by the financial institution for a fixed tenure. It means that the investor must possess a significant disposable amount upfront, which is not always possible for everyone.
On the other hand, in the case of SIP, investors do not need a lump-sum amount upfront for investment. They just need a small portion of their income invested every month for a long duration. The latter offers them convenience as well as flexibility.
2. Returns and Financial Goals:
FD’s returns help investors to beat inflation and preserve their purchasing power for the future. On the contrary, SIP in mutual funds facilitates higher returns which help investors meet their financial needs like buying a home, funding a child’s education, building an emergency fund, and more. Overall, FDs assure guaranteed returns while SIP returns are linked to market volatility.
3. Flexibility:
As stated in the first point, FDs require a large commitment upfront making it challenging for investors to accumulate a lump-sum amount while fulfilling the family’s needs.
On the flip side, one can start SIP with an amount as low as Rs 500. Moreover, you can also pause or stop the SIP if you face any financial problems without any penalty being charged.
4. Liquidity:
The amount you invest in FD gets locked for a fixed tenure whichever you choose. Due to some emergency, if you break the FD prematurely, the bank will charge a penalty fee in such cases.
On the other hand, SIP allows investors to redeem their units anytime they want. You might be charged a small exit fee at the time of redemption, but make sure you read the documents carefully before investing.
5. Risk:
FDs were the most preferred investment scheme by traditional investors because of their low risk. They guarantee that your principal amount will never be affected.
Mutual funds or SIPs, on the flip side, have some risks associated with them. Usually, mutual debt funds have a lower risk because they offer lower returns than equity funds. As you know, the returns of these funds are market-linked, so a short-term fluctuation during the market downturn is expected. In such a case, having a robust risk management strategy, like proper diversification and asset allocation, can help you ride out market volatility.
Conclusion
Wrapping up this blog and understanding the difference between FD and SIP, the final decision between the two investment schemes hinges on the investor’s risk appetite, financial objectives, and the tenure of investment.
If a person has a low-risk profile, then going with FDs would be best as they facilitate guaranteed returns and the safety of the investment. Conversely, SIP offers better potential returns but is equipped with market risks.
Apart from risk, if you consider flexibility, SIP tops the competition as one can easily start, pause, or stop as opposed to that of FDs. In an ideal scenario, having both SIP and FD in one’s investment portfolio can maximize the prospects of wealth creation while providing a safety net.
Frequently Asked Questions
Q 1- What are the minimum days for FD?
Usually, the minimum tenure for FD is seven days. Moreover, different banks or financial institutions have different minimum or maximum tenures.
Q 2 – Is SIP better than FD?
In general, SIPs are considered better for long-term investments due to the potential for higher returns from mutual funds. However, one should always remember that they come with market risks. On the other hand, FDs are a safer option that offers relatively lower returns.
Q 3- Can SIP go in loss?
Yes, SIPs can go into loss if the market value of the invested funds drops below the amount invested, as they are subject to market risks.
Q 4- Is interest in FD taxable?
Yes, interest earned on Fixed Deposits (FD) is taxable as per your income tax slab. A TDS of 10% is deducted if the interest exceeds Rs 40,000 (Rs 50,000 for seniors) annually.
Q 5- What is the 15 – 15 – 15 rule in SIP?
The 15 – 15 – 15 rule under SIP means that an average investor investing INR 15000 each month in a portfolio of mutual funds and earning a return of 15% per annum for a tenure of 15 years stands to get roughly INR 1 crore. This rule emphasizes the benefits of the compounding effect through SIP returns.
