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Comparison between Systematic Investment Plan and Fixed Deposit

Comparison between Systematic Investment Plan and Fixed Deposit

Financial planning holds a very important place in the life of an individual to achieve financial security and financial goals. There are many investment avenues available to investors these days – the most common approach being the Systematic Investment Plan and Fixed Deposits. Let us look at the key differences between Fixed Deposit and Systematic Investment Plan.

Comparison of SIP vs. FD:

In case of a fixed deposit, the investor can invest a lump sum amount for a certain specific period at a fixed rate of interest. On maturity, the investor receives the principal amount (amount deposited) and the interest. However, one can break the fixed deposit before maturity on a penalty charge. 

The tenor for FD can be somewhere between 7 days to 10 years depending on the individuals’ financial goals.

Systematic Investment Plan popularly known as SIP is a method of financial investments in mutual funds. SIP is a regular and disciplined form of investing and an investor has to deposit a certain pre-decided sum of money at regular intervals like weekly, monthly, quarterly, etc. The SIPs are market-based investment therefore, the element of risk is high. 

Amount:

A fixed deposit requires a lump sum amount for a fixed duration as stated above. The minimum amount for the FD can vary from bank to bank. However, the lump sum minimum amount would range somewhere between Rs 1,000 to Rs 25,000 and there is no specific upper limit for investment in FDs.

SIPs in mutual funds is a regular investment. You can invest in SIP with as minimum as Rs. 100/ month. The SIP investment provides the option to change the monthly deposit amount and the term plan at investors’ will.

Risk & Returns:

FD assures fixed returns. There is no element of risk involved if you choose a stable company FD such as Bajaj Finance FD which has been accredited with CRISIL and ICRA ratings. In company FDs the returns are high and the risk is minimal. Company FDs such as Bajaj Finance will provide returns up to 7.35% (for senior citizens) whereas the same FD in a bank will provide returns up to 6.5%.

Let’s compare the FD interest rates of different banks and NBFCs. Category wise FD rates in India are stated below:

CategoryFD Interest Rates
Bank FD4%-6.5%
Post Office FDUp to 6.7%
Company FD (Bajaj Finance FD)Up to 7.35%

In an SIP, the risk is high as the value of a particular fund is highly impacted by the market fluctuations. When the market is bullish, SIP has the potential to generate higher yields. In the case of SIP investments, investors have to keep some factors in mind like the use of diversification techniques, etc. to spread the risk among the portfolio.

Liquidity of investments:

Fixed Deposits have a specified lock-in period. Therefore, FDs offer the very little scope of liquidity from withdrawal purposes, and the penalty is also charged on premature withdrawal.

SIPs provide flexible liquidity options because the investments are open-ended. The investor can withdraw the investment easily and no penalty is charged for withdrawing the SIP

Tax Rules:

The tax on FD is based on the prevailing income tax slab of the investor. You can get TDS deduction by filing Form 15G/H, if you are eligible. 

In SIPs, the taxation is dependent on the type of instrument you are doing the SIP in. 

In an equity mutual fund SIP, no capital gain tax is charged, if the units are sold after a year of purchase. However, the charge of 15% applies to selling the equity mutual funds before a year of purchase. In the Debt mutual funds, if the investor sells after 3 years, the tax applicable 20% with indexation and 10% without indexation. If the investor sells the funds before 3 years, the tax rate is applicable as the income tax slab of the investor.

Both the investment options are popular among investors to create wealth. FDs are the best option for conservative investors who expect stable returns at low-risk. On the other hand, SIP is a better option for those who are ready to take the high-risk as per the market fluctuations.

Author Bio:

Gaurav Khanna is an experienced financial advisor, digital marketer, and writer who is well known for his ability to predict market trends. Check out his blog at Highlight Story.

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