FD VS SIP: Which is the Best Investment for your future?

The Indian market has multiple investment options that you may consider. But investing your hard-earned money is a great deal, and you need to examine your options thoroughly. If your dilemma lies between investing in a standard FD (fixed deposit) or a SIP (systematic investment plan), let’s help you settle for the best! 

Understanding FD:

Fixed deposit is an investment channel offered by non-banking financial companies and banks. A lump sum amount needs to be invested for a specific tenure at a fixed rate of interest. At the end of the consented term, the investor gets the principal amount along with interest. It is not advisable to break an FD before its maturity, as it may attract a penalty. Currently, it is the safest option, yielding guaranteed returns on the investment.

Understanding SIP:

A systematic Investment Plan is a mutual fund investment product that allows investors to invest small and specific amounts at predetermined intervals. The investor can track the performance of this type of investment. Since this is a market-linked option, there is a level of risk one has to undertake while investing in SIP.

SIP vs. FD- Key differences:

  • Investment type

The investor needs to deposit a lump sum amount in an FD, whereas they can invest periodically in a SIP installment. It is possible to start investing in a SIP with as little as Rs. 500/month. This makes SIP a pocket-friendly deal! It is also a flexible investment that allows you to track the performance and change the amount and term plan as per your wish. Contrarily, FD is a rigid investment.

  1. Financial liquidity

When the investor wants to withdraw the invested money, fixed deposits have a lock-in period that does not encourage premature withdrawal. Moreover, if the investor does so- a penalty or early termination of FD is levied by the financial institutions. If you wish to invest in a plan that offers higher liquidity- SIP is the way to go! You can redeem your money as and when you want without affecting its market value. 

  1. Risk factor

Investing in an FD is a low-risk investment since your money is locked in for a specific period. Whereas, in SIP, the investor has to undertake a higher level of risk as this type of investment is directly affected by the market movements. 

  1. Tax implications:

If the deposit tenure is less than five years, the tax on a fixed deposit is charged according to your current income tax slab. Although all FDs charge taxes, investors can claim deductions on investments up to Rs in the Tax Saving FD. 1.5 lakh. No tax is charged when the mutual fund units are sold after a year of purchase.

So, which one is the better option- FD or SIP?

Though FDs seem like the safer option, SIP is a more brilliant option for those who aren’t affected by the risk factor. It is so because the returns on a SIP are more significant than that of an FD. For conservative investors with a low-risk appetite, FD is the ultimate option to receive a guaranteed return. 

The final investment decision must be made by thoroughly analyzing and evaluating the investor’s appetite to handle risks and financial goals. 

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