FD v/s SIP: which is better for investment in long term

For decades, investors in India have invested in traditional assets such as savings bank account, fixed deposits (FDs), gold, and so on. But the recent rise of mutual fund investments these days shows that investors are now viewing the mutual fund market for better returns.

This article takes a close look at FDs and Systematic Investment Plans (SIPs) in mutual funds to decide the right option for your investment portfolio.

Fixed Deposits

Regarded as one of the safest investment vehicles, FDs are financial instruments offered by most banks and financial institutions. They allow you to invest a lump sum amount at a fixed interest rate for a specific period from 7 days to several years.

Benefits of investing in FDs

Here are some merits of investing in FDs:

  • Fixed returns

The most significant advantage that makes FD a safe investment avenue is the assured returns it offers its investors. FDs do not depend on fluctuating market rates. Even if the market is experiencing ups and downs, you could be assured of guaranteed returns at the end of the tenure.

  • Tax benefits

Tax-saver fixed deposits that come with a lock-in period of five years allow investors to claim deductions under Section 80C. The maximum deduction you can claim is up to Rs.1.5 lakh.

  • Loan against FDs

You can use FDs to avail a loan from a bank or a financial institution. Typically, 90% of the fixed deposit’s value can be granted as a loan to the borrower, but it varies from bank to bank.

SIP investments

SIP is an investment medium that allows you to make timely investments in a mutual fund scheme by depositing small amounts. The intervals could be weekly, monthly, quarterly, semi-annually or annually as per your financial budget.

Benefits of SIPs in mutual funds

Once you know how to invest in SIPs easily, here are some advantages you can enjoy:

  • Ease of investment

You can set up the best SIP for long-term investment by choosing the auto-debit facility. Through this, the instalment amount gets deducted from your savings account and is invested in the selected mutual fund scheme.

  • Rupee cost averaging

Since SIPs support small investment amounts at regular intervals, you can receive the benefit of entering the market at different levels. This can help even out your purchase cost, and you could buy more units when the market is low and vice versa.

  • Power of compounding

The sooner you begin investing, the higher could be the impact of the power of compounding on your earnings. A small sum invested regularly can grow to build a large corpus through compounding over a long investment horizon.

Conclusion

In summation, if you are an aggressive customer with a moderate to high-risk tolerance, you can consider investing in mutual funds via SIPs. For a conservative investor looking for assured and stable returns, fixed deposits can be an ideal investment option.

Author: Chakraborty

Dr Chakrabarty is the Chief Innovation Officer of IntuiComp TeraScience. Earlier she was Assistant Professor of Delhi University, a QS ranked university in India. Before that she has held research positions in IIT Mumbai, IIT Chennai and IISc Bangalore. She holds 2 patents and over 20 research publications in her name which are highly cited. Her area of research is in smart technologies, integrated devices and communications. She also has a penchant for blogging and is an editor of Business Fundas.