“FD” and “SIP” are two different types of investment options. “FD” stands for “fixed deposit” and “SIP” stands for “systematic investment plan“. They are both popular investment options in India but have different features. So let me tell you all about the difference between FD and SIP and which is better.
Table of Contents
What is a Fixed deposit?
A fixed deposit is a type of savings account that pays a fixed rate of interest for a fixed term. It is a safe and secure investment option with guaranteed returns.
A fixed deposit is a safe investment option that offers a guaranteed return at a higher interest rate. Additionally, senior citizens can earn an extra 0.50% interest rate when investing in a fixed deposit account.
If you are unsure about which investment option, whether it be a SIP or FD, is best for you, this article will guide you in making an informed decision.
What is SIP?
A systematic investment plan (SIP) is a way to invest in mutual funds. It allows investors to invest a fixed amount at regular intervals (weekly, monthly, etc.) instead of investing in a lump sum. SIPs are a good option for those who want to invest in mutual funds but do not have a large amount of money to invest at once.
In summary, if you want guaranteed returns and a low-risk investment option, FD will be the better option. If you want to invest in mutual funds with regular intervals with a long-term perspective SIP will be the better option.
SIP (systematic investment plan) is an alternative option for those who want to invest in mutual funds but do not have a large amount of money to invest at once. SIP allows individuals to invest a small amount of money on a regular basis, similar to a “step-by-step” approach to investing in mutual funds.
SIP also works like a goal-oriented investment. The best thing is that people can easily achieve their objectives and future goals with the help of SIP. You can also use the SIP calculator to know the interest before investing in SIP.
SIP offers the benefit of compounding, which is the process of reinvesting the accumulated profits. This results in an increase in the principal amount due to the reinvestment of the interest earned on the original principal.
Pros of fixed deposits
- Fixed deposits are a risk-free investment option.
- They offer guaranteed returns on investments.
- Investors have the flexibility to choose the amount and tenure of investment according to their needs and convenience.
- Overdraft withdrawal is easily available with fixed deposits.
- Tax benefits can be availed if you invest in a five-year tax savings FD.
- Investors can easily make the overdraft withdrawal through FD.
- Loans can be easily availed, depending on the fixed deposit term and amount.
Pros of systematic investment plan
- SIP does not require monitoring of interest rates.
- It offers a low initial investment, making it a viable option for making regular monthly investments without putting a strain on your budget.
- People can easily invest in SIP according to their needs and preferences.
- Bonus features of SIP allow for tracking of assets at a convenient level.
- Unlike FDs, SIPs allow for easy deposit or withdrawal of funds.
Cons of fixed deposit
The returns on fixed deposits are generally lower than other investment options like equities or mutual funds.
Fixed deposits have a lock-in period, meaning the invested money cannot be withdrawn before the maturity date.
Early withdrawal of fixed deposits may result in a penalty and lower returns.
Fixed deposits are not suitable for short-term financial goals as they require the investment to be locked in for a specific period of time.
They do not offer flexibility to make changes in the investment plan, once the amount is invested.
They may not be suitable for those looking for high returns in a short period of time.
They may not be suitable for those looking for high liquidity.
The rate of interest may fluctuate over time and may not be as favorable as the time of investment.
Cons of SIP
- Limited flexibility in terms of investment options
- Risk of poor returns if the market performs poorly
- The possibility of missing out on short-term market opportunities
- Potential for high fees if not managed properly
- Dependence on the performance of the fund manager
- Limited control over the investment portfolio
- Risk of fraud in case of unregistered or unregulated fund managers
- Risk of not being able to withdraw money in case of an emergency
- Risk of losing money in case of a market crash
- Dependence on the performance of the mutual fund.
SIP and FD are both investment options that offer unique benefits to different individuals. It’s important to note that there are distinctions between the two. As an investor, it’s crucial to first assess your needs and goals, consider the aforementioned differences, and then select the investment option that best aligns with your requirements.
FAQ for Fixed Deposit
Q: What is a Fixed Deposit?
A: A Fixed Deposit is a type of savings account offered by banks and other financial institutions, in which the depositor agrees to leave their money in the account for a fixed period of time, typically ranging from a few months to a few years. The depositor earns a fixed interest rate on the deposit, which is typically higher than the rate offered on a savings account.
Q. What are the benefits of a Fixed Deposit?
Some benefits of a Fixed Deposit include:
- Guaranteed returns: The interest rate on a Fixed Deposit is fixed, so the depositor knows exactly how much they will earn on their deposit.
- Safety: Fixed Deposits are generally considered to be a safe investment option, as they are insured by the government.
- Flexibility: Fixed Deposits typically have a range of tenures to choose from, so depositors can choose the one that best suits their needs.
- Liquidity: Most Fixed Deposits can be prematurely withdrawn, but usually with a penalty.
Q. What is a Systematic Investment Plan (SIP)?
A: A Systematic Investment Plan (SIP) is a way of investing in mutual funds. SIP allows an investor to invest a fixed amount of money at regular intervals (weekly, monthly, quarterly) into a mutual fund scheme.
Q. What are the benefits of SIP?
Some benefits of SIP include:
Rupee cost averaging: SIP allows investors to buy more units when the price is low and less when the price is high.
Flexibility: SIPs can be started with a small amount and can be increased or decreased as per the investor’s convenience.
Discipline: SIP enables investors to save a fixed amount of money at regular intervals, inculcating discipline in saving and investing.
Convenience: SIPs can be set up with a one-time mandate and then continue automatically.