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.
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 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.
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.