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The Indian financial market has been witnessing many changes in recent years. Newly financial instruments have gained prominence along with the previous instruments that exist. Hence, there are plenty of investment options in the industry, like stocks, fixed deposits, mutual funds, bonds, etc. However, it is sometimes confusing for investors in deciding which option is suitable for them. Especially when there is a topic of FD vs SIP, FD is the most favourable investment for many investors.  Here, in this article, we aim to provide more information about SIP vs FD and understand which investment option is better based on your financial needs.  

Long Term Portfolio
Long Term Portfolio

The right mutual funds for your long-term goals with inflation-beating growth plus risk management.

Indicative returns of 10-12% annually

Indicative returns of 10-12% annually

Investment horizon of 5+ Years

Investment horizon of 5+ Years

No lock-in

No lock-in

Long term goals such as retirement or building your wealth

Long term goals such as retirement or building your wealth

FD Vs SIP: Key Differences

The following table summarizes the key differences between FD and SIP

Basis of DifferenceSIPFixed Deposit (FD)
Type of InvestmentWeekly, monthly, or quarterly.Lumpsum
Nature of ReturnsDividends and Capital GainInterest income
Minimum Investment AmountINR 500INR 1,000 – INR 10,000
ReturnsMarket LinkedFixed
RiskEquity investments are high risk options.No risk.
Investment TenureNo fixed tenure, suitable for short, medium and long term.6 months up to 5 years
LiquidityHighly liquidLess liquid than SIPs.
TaxationCapital Gains on investments held for less than one year are taxed at 15%.
Capital Gains above INR 1 Lakh, on investments held for more than one year, are taxed at 10%.
Attracts 10% TDS if interest income exceeds INR 10,000 per annum. Interest is added to the total taxable income and is taxable as per the applicable slab rate.
SuitabilityAggressive as well as conservative investorsConservative investors
RegulatorSEBIRBI

What is Systematic Investment Plan (SIP)?

SIP Systematic Investment Plan is one of the methods of investing in mutual funds. Through SIP, individuals can invest a fixed sum of money at regular intervals – weekly, monthly, quarterly, etc., in any of the mutual fund schemes. The money is auto-debited from the investor’s bank account on a selected date and directed towards the mutual fund scheme chosen by the investor. 

Usually, Systematic Investment Plans SIP is a preferred investment option among mutual fund investors. It helps them to invest in a disciplined manner without worrying about market volatility and timing the market. Also, SIPs are least affected by market volatility due to rupee cost averaging.  

Generally, Systematic Investment Plans SIP is suitable for first-time investors looking to invest in equity funds. This allows investors to spread their investments over time and park their money at different market levels. Furthermore, investors can create long term wealth by investing a small sum of money through SIP. Hence, SIP is the best way for inculcating a habit of saving and investing regularly. Apart from that, investors can avail the benefit of the power of compounding when they start early with a longer investment horizon. Moreover, investing in tax saving schemes, i.e. ELSS funds (Equity Linked Savings Scheme) through SIP provides a tax exemption under Section 80C up to INR 1.5 lakhs. 

What is a Fixed Deposit FD?

A fixed deposit is financial instruments offered by banks, post offices or NBFC (Non-Banking Financial Company). A certain lump sum amount is deposited in a bank fixed deposit for a specific period ranging from 7 days to several years. The FD rate offered is higher than the regular savings account or salary account. However, breaking a bank fixed deposit is not advisable. A premature withdrawal is allowed for an early closure penalty. 

Fixed deposits are safe investment instruments. There are different types of Fixed Deposit Schemes where investors can choose a scheme on the basis of their short term or long term goals. Also, fixed deposits offer assured returns on the investment. Investors can also get a loan against their FD depending on the amount. Furthermore, deposits up to INR 1lakh are insured under the Deposit Insurance and Credit Guarantee Scheme of India. 

One can use Scripbox’s FD calculator to estimate their FD returns and know their FD interest rate. 

Compare SIP Vs FD

The following are the key parameters to understand SIP vs FD

Minimum Investment Amount

In Mutual funds SIP mode, the minimum investment amount starts with INR 500. Hence, such a small amount does not pinch people’s pockets. Moreover, the SIP frequency can be weekly, monthly or quarterly on investor’s convenience. 

In Fixed Deposits, the minimum investment amount ranges from INR 1000 – 10000. Also, one can invest in FD in lump sum mode only. Therefore, investors cannot keep investing the amount like SIP

Returns

In SIP, the returns are fluctuating. The SIP returns are entirely dependent on the performance of the stock market. If the stock market performs well, the mutual fundsSIP  performs accordingly. Thus, during the bull market, SIPs tend to deliver better returns than fixed deposits

In a Fixed Deposit, the returns are predetermined. During the fixed deposit investment, the returns are secure payments throughout the tenure of the investment. The fixed deposit return depends on the bank chosen by the individual. 

Risk

There is a phrase “Mutual funds investments are subjected to market risk” floating in the market. This is because every mutual fund investment is linked to market risk. Also, the risk depends on the type of fund SIP chosen. Hence, SIPs tend to be affected by market movements. 

The risk in an FD is comparatively low. The depositor will continue to receive the interest payment along with the principal amount. Therefore, fixed deposits are immune to market movements. However, a bank can still go bust. In such a case, FDs have insured up to INR 1 lakh under the Deposit Insurance and Credit Guarantee Scheme of India. 

Investment Tenure

Generally, SIP investments are preferable for the long term horizon. Also, SIPs are referred to in the context of equity funds. It means that, the longer the investment horizon, the better are the revenues. The compounding factor also helps investors in wealth accumulation and builds a corpus over some time. 

Fixed Deposits are traditional investment avenues. One can invest in both short term and long term investment purposes. The tenure of fixed deposits can be 6 months, 1 year and go up to 5 years. 

Liquidity

SIP investment is more liquid in comparison to FD. In the case of SIP, one can redeem their investment anytime. For equity mutual funds, the amount gets credited in T+3 days. For debt funds (Fixed income funds), the amount gets credited in T+2 days in the investor’s bank account. Also, one can stop SIP without paying any charges. 

Fixed deposits are not easy to redeem as they come with a lock-in period. One needs to wait till the end of the tenure to receive the amount. However, premature withdrawals attract penalty. 

Taxation

Investment in mutual funds through SIP is subject to short term capital gains (STCG) or long term capital gains(LTCG). In case of equity mutual funds, short term capital gains is chargeable flat 15%. Whereas, long term capital gains is chargeable at 10% for the earnings above 1 lakh. However, LTCG is chargeable at 20% after indexation in debt funds, whereas STCG is as per the individual income tax slab rate. Moreover, investing in a tax-saving scheme, i.e. ELSS funds (Equity Linked Savings Scheme) through SIP mode provides a tax exemption under Section 80C up to INR 1.5 lakhs in a financial year.  

Fixed deposits taxation is as per the depositor’s income tax slab rate. Also, FDs are subject to 10% TDS on interest earned over INR 10,000 in a financial year. One can also invest in a tax saving FD to avail tax benefit under Section 80C up to INR 1.5 lakhs. 

One can use Scripbox’s income tax calculator to calculate their income tax liability. 

Read also about the NPS vs SIP

You may also like to read about the RD vs FD vs SIP

FD Vs SIP: Which is Better?

In India, both SIP and FD Fixed Deposits one of the investment choices for individuals who wish to create wealth over a while. FDs are a secure investment option available to investors looking for the safety of their capital. On the other hand, SIPs can also be beneficial, taking into consideration all the risk factors. Furthermore, SIPs caters to a wide range of investors having diverse risk profiles. 

Every investor must consider their financial goals before deciding to invest their money. One must align their investments, whether SIP or FD to their short or long term investment objective. Also, investors must have a proper understanding of risk before choosing to invest in SIP. Those who have low-risk tolerance levels and are looking for guaranteed returns, then FD is more suitable to them. On the other hand, those who are looking for disciplined investment by investing monthly, then SIP is a preferable option. Therefore, having a proper financial plan in place helps investors for a wise investment decision. 

Scripbox’s mutual fund calculators like SIP calculator and returns calculator are available online, allowing investors to check their potential returns from any fund. 

You may also like to read about Arbitrage Fund Vs FD

Frequently Asked Questions

What are the key benefits of investing in a SIP Systematic Investment Plan?

The following are the key benefits of investing in a SIP.
Simple and Convenient: As the name suggests, investing in SIP is systematic. It allows individuals to take advantage of investing a small amount of money regularly without any hassle. Investors can set up an auto-debit mandate facility by sending a one-time instruction to the bank. Hence, a particular amount is deducted on a specified date and directed towards the investor’s fund SIP scheme. 
Power of Compounding: For wealth creation, investors should start investing early and regularly. The power of compounding increases with a longer investment horizon. Investors can start with an investment as small as INR 500 every month through SIP. Thus, this small amount invested regularly can grow to a large amount. This includes not only an individual’s contribution but also the returns that compound over the years. 
Rupee Cost Averaging: Investing in SIPs eliminates the need for timing the market. An individual just needs to park a fixed amount of money for a specific duration regularly. Even though the amount is constant, investors buy more units when the price is low (i.e. when markets are down). Similarly, investors buy lesser units when the price is high (i.e. when the markets are rising). This helps to bring down the average cost per unit.

What are the key benefits of investing in a Fixed Deposit FD?

The following are the key benefits of investing in a Fixed Deposit.
Fixed Returns: Unlike an investment in the stock market, FD interest rates do not fluctuate as per the market movement. Even if the stock market is not performing well, one can be assured that their fixed deposit is not affected. Hence, investors can be certain that investment in fixed deposit is secure. They will receive the principal amount along with FD interest rates payment at the end of the tenure. 
Loan Against Fixed Deposit: Fixed deposits are also a tool for availing loans from banks. In other words, if an individual holds fixed deposits, they can avail a loan against that FD. Typically, the lending institutions offer loans up to 90% of the fixed deposit value. However, the percentage may vary from one bank to another. The individual keeps earning interest on their fixed deposit even though the loan is availed against the FD. It is important to note that the loan tenure cannot be more than the fixed deposit period. 
Tax Benefit: Investors can claim tax benefits under Section 80C of Income Tax Act, 1961 by investing in tax saving FD schemes. The maximum deduction that one can claim under this section is INR 1.5 lakhs in a financial year. However, such fixed deposits come with a lock-in period of 5 years.