SIP vs. FD – Which is the better investment option?

Reliable and risk-free fixed deposits are the tried-and-true investment option for most Indians. But in recent years, a new rival has emerged in terms of popularity. Investing in mutual funds through systematic investment plans (SIPs) is on the rise. According to the Association of Mutual Funds in India (AMFI), Indian mutual funds currently have more than six crore SIP investment accounts through which investors regularly invest in the schemes of their choice!

The increase in the popularity of SIPs suggests that Indians are no longer restricting themselves to fixed deposits and are adopting new financial strategies to maximise their returns. But does this mean SIPs are better than FDs? Should you stop investing in fixed deposits altogether and channel all your savings into SIPs? Well, these questions demand some digging.

So, let us answer the question “Is SIP better than FD” and settle the FD vs SIP debate.

What is an FD investment?

When you create an FD, you lock a lump sum amount at a fixed rate of interest for a fixed period of time. Then, you earn interest on the investment amount over time.

Simple, isn’t it? And this is why many investors believe that FD investments are easy to track and manage. Plus, the returns are guaranteed because FDs are not affected by market fluctuations. Today, you can choose from various fixed deposit products, from bank deposits to corporate fixed deposits. You can start investing through your bank or financial institution’s online portal, website, or mobile app and transfer money to your FD account right from your savings account.

For best results, plan your investments in ladders of fixed deposits. When you create a ladder of FDs, you invest your money partially into several deposit accounts with different maturity dates. Thus, you get regular liquidity and the opportunity to reinvest your maturity amount into FDs with higher interest rates.   

What is a SIP investment?

A Systematic Investment Plan (SIP) is a method of investing in mutual funds where you invest a fixed amount regularly, such as monthly or quarterly. It allows you to purchase units of a mutual fund scheme at different market levels, averaging the cost of investment over time. SIPs are ideal for disciplined, long-term investing and help you build wealth gradually without the need for large lump-sum investments. With SIPs, you can mitigate market risk through rupee cost averaging and build a substantial corpus over time.

Difference between SIP and FD

FD vs. SIP: The limitations of FDs

The only way to generate high returns from fixed deposits is to invest a high principal amount and then stay invested for the long term. However, over the course of their tenure, fixed deposit interest rates are unable to beat the rising inflation rates. And so, as an investor, it is important not to rely on fixed deposits alone. You also need to take advantage of investment options that outpace inflation, such as mutual funds.

Mutual fund investments provide higher returns than fixed deposits in the long term. What’s more, you don’t need to make a lump sum investment in mutual funds. Instead, you can start investing in small amounts through a systematic investment plan (SIP). Let us have a look at the benefits of SIPs for investors and see FD vs. SIP: which is better?

FD vs. SIP: Which investment option is better?

Systematic Investment Plans (SIPs) are a convenient investment method that allows you to invest in mutual funds in a systematic, regular, and consistent way. Instead of making a lump sum investment, you can invest a fixed amount at regular intervals, typically monthly or quarterly.

When it comes to FD vs. SIP, the latter offers several advantages. Here is a quick look at some benefits of SIPs over traditional fixed deposits.

1. You can start small: If you don’t have a lot of savings but still want to start investing, you can start a SIP with amounts as low as Rs. 500. This makes SIP an excellent option for those who don’t want to lock a lump sum of money in a fixed deposit. (And this is where the latter wins a point in the FD vs. SIP debate!)

2. SIPs promote financial discipline: Investing at regular intervals encourages you to stick to a regular savings and investment plan.

3. Rupee cost averaging: By investing a fixed amount consistently over time, you can protect your investments from market volatility and benefit from Rupee cost averaging. This means that during market downturns, you automatically buy more units of the mutual fund, and during market upswings, you buy fewer units. Over the long term, this potentially lowers the average cost per unit and increases your overall returns.

4. Flexibility and convenience: You can choose the investment amount and duration according to your investment capacity, financial goals, and risk appetite. You can invest in a wide range of mutual funds as well, including equity funds, debt funds, hybrid funds, and more. Thus, you can build a diverse portfolio and align your investments with your specific investment objectives.

5. Benefit of compounding: SIPs offer the benefit of compounding. What this means is that as your invested amount grows over time, the returns generated are reinvested. This leads to an exponential growth in returns.

FD vs. SIP: Are SIP investments safe like FDs?

Unlike mutual fund investments, SIPs are affected by market fluctuations. This means that they do not guarantee returns like fixed deposits. So, does the risk factor alone make FD the winner in the FD vs. SIP competition? Not quite!

There is no reason to believe that SIPs are bad investment options only because they pose a higher risk compared to fixed deposits. With due research, planning, and portfolio management, you can protect your investment against market risks and enjoy higher returns in the long term.

Here are some tips to make the best of your SIP investments:

1. Assess your financial goals and risk tolerance before you invest.

2. Select mutual fund schemes that align with your goals.

3. Invest for the long-term.

4. Diversify your portfolio, i.e., make sure you invest in various asset classes.

5. Keep investing consistently.

6. In case of market volatility, do not ‘panic sell’ your mutual fund units.

Start investing!

The FD vs. SIP debate has long confused those who want to kick-start their journey to financial freedom. But now that you know the difference between FD vs. SIP investments, Download our SIP app and start today!

Frequently asked questions

1. Are SIPs safe investment options?

SIPs invest in mutual funds, which are subject to market risks. While SIPs can mitigate risk through rupee cost averaging and are considered relatively safer than lump-sum investments, they are not entirely risk-free.

2. Is SIP better than FD?

Whether SIP is better than FD depends on your financial goals and risk tolerance. SIPs can offer higher returns than FDs, but they come with market risks. FDs, on the other hand, offer guaranteed returns with no risk, making them suitable for conservative investors. 

3. Can I grow wealth with FDs?

Yes, you can grow wealth with FDs, but the growth is usually moderate due to the fixed, lower interest rates. 

4. Does SIP give better returns?

SIPs have the potential to give better returns compared to FDs, especially over the long term, as they benefit from market-linked growth, compounding, and rupee cost averaging. However, returns from SIPs are not guaranteed and depend on the performance of the underlying mutual fund and market conditions.