SIP vs FD - How SIP is better than FD?

With the help of a systematic investment plan or an SIP, a person can invest a fixed sum regularly in a scheme of mutual funds^^. The money is typically invested in an equity mutual fund scheme. If you are new to the world of mutual funds, an SIP is one of the best investment options for you. This way you will learn to make timely investments.

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SIP Benefits
Start SIP with as low as ₹1000
Start SIP with as low as ₹1000
No hidden charges
No hidden charges
Save upto ₹46,800 in Tax
Save upto ₹46,800 in Taxunder section 80 C
Zero LTCG Tax
Zero LTCG Tax^ (Unlike 10% in Mutual Funds)
Disciplined & worry-free investing
Disciplined & worry-free investing

You will be able to accumulate a large amount of money in a certain time period. Making an investment in mutual funds through an SIP will offer you good returns also. There are various advantages of investing in systematic investment plans. The investment can be made according to the need of the investor. The investor can easily track the performance of the investments. It is quite easy to make an investment in an SIP without roaming here and there. If you invest in an SIP for more than a year, you are eligible to enjoy various tax benefits. Through SIPs, you make an investment in open-ended funds which means that you can easily withdraw and invest money at any time.

What is a Fixed Deposit - FD?

A fixed deposit is a financial instrument offered by non-banking financial companies and banks. An investor puts a lump sum amount at a fixed interest rate for a fixed period of time. It is one of the safest investment options available in the market as it assures higher returns on the investment made by the investor. Non-banking financial companies and banks offer different kinds of fixed deposits according to the need of investors for meeting short term goals and long term goals. Fixed deposits also have various benefits. The best thing about fixed deposits is that you get assured returns on your investment. The investment that you make in fixed deposits is tax-free. Fixed deposits provide flexibility as investors can choose the time period and amount according to their requirement. You can get loan depending on the investment you made in fixed deposits. Whenever an emergency occurs, an investor can easily get the FD closed and can withdraw the amount via overdraft. If you make an investment in tax saving fixed deposits for 5 years then you are eligible to enjoy various tax benefits.

Both the investment options including fixed deposits and systematic investment plans have various advantages and have a lot to offer to the investors. Check out the table given below that will help you to differentiate between these two investment options:

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SIP vs FD

Parameters Fixed Deposit Systematic Investment Plan
Best investment option for Conservative investors only Aggressive as well as conservative investors
Type of investment In lump-sum In installments
Liquidity High Low/Medium
Risk factor Low High
Returns Guaranteed Can’t be guaranteed
Nature of returns Interest Dividends and capital gain
Tax Tax is charged depending on the income tax slab in which the investor falls. If the units of mutual funds are sold after the completion of a year, the tax will be charged as per the long term capital gains clause. The tax will be charged at 15% if the mutual fund units are sold before the completion of a year.

 

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As you go through the table, you will notice some major differences between SIP and FD. This will help you to select the best investment option according to your requirement. Check out these differences:

Tax: In fixed deposits, the income tax is charged according to the income tax slab in which you fall. Tax saving FD is the type of FD in which an investor can claim a deduction of Rs. 1.5 lakh. All other types of FD charge tax from investors. On the other hand, there will be tax as per long term capital gains on units that were bought after 31st January 2018.  Short term capital gain of 15% tax is charged if you sell the mutual fund units before the completion of a year.

Amount of investment: The type of investment one makes in systematic investment plans is in installments. The type of investment one makes in fixed deposits is in lump-sum. It is quite easy to start investing in any of the investment options including systematic investment plans and fixed deposits. When you consider the rates that systematic investment plans and fixed deposits offer, you will realize that it is easy to start investing in SIPs in comparison to FDs. The reason is that in SIPs, you can start your investment with a small amount and have a possibility to earn higher returns.

Rates of interest: The rates of interest that are provided to the investors in case of systematic investment plans are higher in comparison to fixed deposits. Though, the risk factor associated with SIPs is quite high. Fixed deposits assure higher returns to the investor.

Systematic Investment Plan is a better investment option in comparison to Fixed Deposit especially if you consider the flexibility of investment, advantage of diversification, tax benefits, and higher returns. That is why it is better to invest in a systematic investment plan than in fixed deposit.

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What are long term capital gains?

Long term capital gains (LTCG) refer to an investment made for a term longer than 1 year. If an investor stays invested in an equity based scheme for more than 1 year, the gains made on selling the units are called long term capital gains and are taxable as per below description. LTCG is applicable only on Mutual Funds which have more than 65% equity investments. Therefore, an investor will be paying a 10% tax on long term capital gains above Rs 1 lakh a year. However, the LTCG made till January 31, 2018, shall remain grandfathered, i.e., gains will remains tax-exempt.

SIP plans available in

5 YEARS SIP Plans
Returns upto 19%
7 YEARS SIP Plans
Returns upto 18%
10 YEARS SIP Plans
Returns upto 16%
12 YEARS SIP Plans
Returns upto 14%
15 YEARS SIP Plans
Returns upto 15%
20 YEARS SIP Plans
Returns upto 15%

What are short-term capital gains?

If an investor sells units from an investment that they bought less than a year ago, the gains are called short term capital gains. All short term capital gains are taxable and an investor will have to pay a tax of 15% on all profits made.

Conclusion

Both a systematic investment plan or an SIP and a fixed deposit are good investment options available in the Indian market. In a systematic investment plan or an SIP, a fixed sum is invested regularly in a scheme of mutual funds. Typically amount is invested in an equity mutual fund scheme. If you are planning to invest in mutual funds for the first time, SIP is the best option available for you. By making an investment in systematic investment plans, you learn to make investments on time. There are many advantages of investing in mutual funds through systematic investment plans. You can accumulate a huge amount by investing in systematic investment plans for a specified period of time. There is a risk element attached to systematic investment plans. That is why systematic investment plans also promise higher returns. The investment can be easily tracked by the investors. You are eligible to enjoy various tax benefits if you invest in an SIP for more than a year. You make an investment in open-ended funds through SIPs means you can easily withdraw and invest your money at any time.

Non-banking financial companies and banks offer fixed deposits. In this, a fixed amount is invested by the investor for a certain period of time. If you want to invest in an option which is safe and assures higher returns then fixed deposit is a good option for you. Different kinds of fixed deposits are offered by non-banking financial companies and banks as per the short term requirements and long term requirements of the investor. There are many advantages of investing in fixed deposits such as assured higher returns and safe investment option. Fixed deposit investment is tax-free. The investors can easily choose the time period and amount according to the need. This way fixed deposits provide flexibility to the investors. The investor can easily close a fixed deposit or withdraw an amount from a fixed deposit in case of an emergency. If an investor makes an investment in tax saving fixed deposits for 5 years then he or she is eligible to enjoy various tax benefits.

There are many differences between fixed deposits and systematic investment plans. Some of the common parameters on the basis of which you can differentiate between fixed deposits and systematic investment plans are the tax, nature of returns, risk factor, returns, type of investment, liquidity, and more. Fixed deposit is the best investment option for conservative investors only. On the other hand, systematic investment plan is the best investment option for aggressive as well as conservative investors. In fixed deposits, the investment is made in a lump-sum. In a systematic investment plan, the investment is made in installments. A fixed deposit is a highly liquid investment option.  A systematic investment plan has low or medium liquidity. The risk involved with fixed deposits is quite low and the risk associated with a systematic investment plan is quite high. Fixed deposits assure higher returns. On the other hand, returns cannot be guaranteed in a systematic investment plan or an SIP. There is no doubt in the fact that an SIP provides higher returns in comparison to fixed deposits but there is no guarantee of returns in an SIP. In case of fixed deposits, the tax is levied on the basis of the income tax slab in which an investor falls. If mutual funds units are sold after the completion of a year, tax will be charged according to the long term capital gains clause. The tax will be levied at 15% if the mutual fund units are sold before the completion of a year.

+The Returns are 5 years of cost-adjusted returns of large-cap funds as of 18 Dec 2023, as per moneycontrol.
^If premium payable is below Rs. 2.5 lakh in any year . Standard T&C Apply
*Past 10 Year annualised returns as on 01-12-2023
*All savings are provided by the insurer as per the IRDAI approved insurance plan. Standard T&C Apply
~Source - Google Review Rating available on:- http://bit.ly/3J20bXZ
^^The information relating to mutual funds presented in this article is for educational purpose only and is not meant for sale. Investment is subject to market risks and the risk is borne by the investor. Please consult your financial advisor before planning your investments.

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