In recent years, Indian financial market has witnessed tremendous changes. The newly introduced financial instruments have gained high popularity along with the preexisting financial instrument.
Nowadays, there are a plethora of investment options available in the market such as stock, fixed deposit, mutual fund, government bonds, etc.
With a wide range of investment options available in the market, people often find it difficult to choose the right investment option which helps to accumulate wealth in the long-term and offers a good return on investment. There are many potential investors who prefer investing in mutual fund through SIP and in fixed deposit. Further, in this article, we will give some insight into how SIP is a better investment option than FD.
What is Systematic Investment Plan (SIP)?
SIP is a process of investment through which an individual can invest a fixed amount of money in a mutual fund scheme of their choice at particular intervals of time. The investment in SIP can be made in weekly, monthly and quarterly basis. In SIP investment the money gets auto debited from the bank account of the investor on the chosen date and is directed towards the scheme.
SIP investment has emerged as the safest and disciplined method of long-term investment through which the investors can invest regularly in the market and can accumulate wealth in the long-term. SIP is a great option of investment for first-time investors. With a wide range of SIP plans available in the market, one can take help of SIP calculator in order to choose the best SIP to invest in 2019.
What are Fixed Deposits (FD)?
Fixed deposits are a type of financial instrument offered by banks and non-banking financial companies. In fixed deposits, the investors are allowed to put a lump-sum amount at a fixed interest rate for a specific period of time. Fixed deposits are considered as one of the safest options of investment available in the market, which ensures a high return on investment in the long-term. In order to cater to the requirement of the investors, banks and non-banking financial companies offer a different kind of fixed deposits. One of the major benefits of investing in FD is that the investors get assured return on their investment and the investment made in FD is tax exempted under section 80C of Income Tax Act 1961.
Both investment options have their own pros and cons. Let’s take a look at the difference between SIP and FD.
|Systematic Investment Plan||Fixed Deposit|
|SIP is a lucrative investment option for conservative as well as aggressive investors.||FD is the best investment option for conservative investors.|
|In the SIP plan, the investment can be made in installments.||In FD the investment is made in lump-sum.|
|SIP offers medium to low liquidity.||Fixed deposits offer high liquidity.|
|In SIP investment the risks involved are high.||In banks FD the risk involved in low.|
|SIP offers a higher return on investment.||The return on investment is low as compared to SIP.|
|The return on investment entirely depends on the market performance of the fund.||In FD, the returns are guaranteed.|
|The nature of returns on SIP is dividends and capital gains.||The nature of return on fixed deposit is interest.|
|In case the mutual fund units are sold after the completion of a year then the tax will be charged according to long-term capital gain clause.15% tax is charged in case MF units are sold before the completion of the year.||Depending on the income tax slab rate the investor’s falls, the tax rate is charged.|
Let’s take a closer look at the differences:
- Investment Amount
If we see the type of investment available for potential investors with regard to FD and SIP, then it is easy to make an investment in both financial instruments. However, considering the rate offered by both the financial instrument, investing in SIP is comparatively easier as compared to FD. This is because; one can start SIP investment with a small amount and earn higher returns on investment. On the other hand, the investors are required to make a lump-sum investment in FD. Even though FD offers ensured returns to the investors in the long term, the returns are comparatively low as compared to SIP.
- Interest Rates
One of the other reasons why one should consider investing in SIP is that SIP offers a higher rate of interest as compared to the FD. However, the returns on SIP entirely depend on the market performance of the fund.
Tax saving is one of the important aspects of investment. Most FDs are taxed on the basis of the IT slab the investors fall under. However, if an individual wants to save on taxes than they can invest in tax saving FD and can avail tax exemption up to Rs.1.5 lakh on investment amount under section 80C of Income Tax Act. On the other hand in case of SIP, 15% tax is charged in case the MF units are sold before the completion of the year.
Wrapping it Up!
Even though, FDs are the safe investment option which ensures guaranteed returns in a long-term, investing in mutual fund SIP is more rewarding in many ways. If you have a higher risk appetite and if you want to gain a higher return on investment in a long-term than SIP investment is the right choice of investment.