Difference between SIP and FD

Investing money wisely is a crucial aspect of financial planning. When it comes to choosing the right investment options, Fixed Deposits (FD) and Systematic Investment Plans (SIP) are two popular choices among individuals. While both offer potential returns and secure investment avenues, they differ significantly in terms of features, benefits, and suitability for various financial goals. Let’s delve into FD vs SIP, and explore the differences between FD and SIP.

What is FD?

Fixed Deposit (FD) is a financial instrument offered by banks and non-banking financial companies (NBFCs). It involves depositing a fixed sum of money for a specified period at a predetermined interest rate. At the end of the tenure, the investor receives the principal amount and the accrued interest.

What is a SIP?

A Systematic Investment Plan (SIP) is an investment strategy in which individuals invest a fixed amount at regular intervals in mutual funds. Rather than investing in a lump sum, SIP allows investors to spread their investments over time, mitigating the impact of market volatility. SIPs offer the benefit of rupee cost averaging and allow investors to benefit from the power of compounding.

Advantages of Fixed Deposits

  • Guaranteed Returns: FDs offer a guaranteed return on investment, ensuring capital preservation
  • Low Risk: FDs are considered low-risk investments as they are backed by the bank’s reputation and often come with insurance coverage
  • Stable Income: The fixed interest payout can serve as a steady source of income
  • Flexible Tenure: FDs have flexible tenure options ranging from a few months to several years

Advantages of SIP

  • Rupee Cost Averaging: SIPs help mitigate the impact of market volatility by buying more units when prices are low and fewer units when prices are high
  • Flexibility: You can start a SIP with a small amount and increase it gradually at your convenience.
  • Professional Fund Management: SIPs provide access to professional fund managers who manage the investment portfolio.
  • Long-Term Wealth Creation: SIPs, when invested over the long term, have the potential to generate substantial wealth due to the compounding effect.


FeatureFixed Deposit (FD)Systematic Investment Plan (SIP)
Investment MethodLump sum investment of a fixed amountRegular investments of a fixed amount
ReturnsAssured returns with fixed interest ratesMarket-linked returns based on the performance of mutual funds
RiskLow riskSubject to market risks
Lock-in PeriodGenerally has a lock-in period, restricting premature withdrawalsGenerally does not have a lock-in period
LiquidityLimited liquidity during the lock-in periodFlexible liquidity, allowing partial or complete redemption
Tax ImplicationsInterest earned is taxable as per the income tax slabTax benefits available in certain schemes (e.g., ELSS)
Investment ApproachConservative approach with a fixed investment amountDisciplined approach with regular investments
FlexibilityLimited flexibility to modify investment amountFlexibility to increase, decrease, or pause investments
Suitable forRisk-averse investors with short-term goalsInvestors aiming for long-term wealth creation and growth potential

Key Differences between FD and SIP

While both FDs and SIPs are investment options, they have several crucial differences that investors should consider before making a choice:

1. Liquidity

FDs are less liquid compared to SIPs. While FDs have a fixed tenure, premature withdrawal can result in penalties and reduced interest earnings. SIPs, on the other hand, offer more liquidity as you can redeem your investments at any time, subject to exit loads in some cases.

2. Taxation

FD interest is taxable as per your income tax slab, and Tax Deducted at Source (TDS) may apply. In contrast, the tax implications for SIPs depend on the type of mutual fund and the holding period. Some mutual funds offer tax benefits under specific schemes like Equity-Linked Savings Schemes (ELSS).

3. Flexibility

FDs come with a fixed tenure, and it may be challenging to withdraw the invested amount before maturity.

In contrast, SIPs offer flexibility as you can start, stop, increase, or decrease your investment amount at your convenience.

4. Interest Rates

FD interest rates are fixed at the time of investment, offering a predetermined return throughout the tenure. In SIPs, the returns are not fixed and are subject to market fluctuations, which can result in varying interest rates.

5. Tenure

FDs offer flexibility in choosing the tenure, ranging from a few months to several years. SIPs do not have a fixed tenure and can be continued for the long term as per your investment goals.

Factors to Consider When Choosing Between FD and SIP

When deciding between FD and SIP, several factors should be considered:

1. Financial Goals and Time Horizon

Consider your financial goals, such as short-term or long-term objectives. If you have specific financial milestones or plans for the near future, an FD might be more suitable. For long-term goals like retirement planning or wealth creation, SIPs can offer better growth potential.

2. Risk Tolerance

Evaluate your risk appetite. FDs are a safer choice if you are risk-averse and prioritise capital protection. However, if you have a higher risk tolerance and are willing to endure market volatility, SIPs have the potential to generate higher returns over the long term.

3. Liquidity Requirements

Assess your liquidity needs. If you anticipate the need for immediate access to your funds, FDs may not be the ideal option due to their lock-in periods. SIPs provide more flexibility, allowing you to redeem your investments partially or completely whenever required.

4. Tax Planning

Consider your tax planning requirements. If you aim to optimise your tax liabilities and take advantage of tax deductions, SIPs invested in ELSS funds can be beneficial. However, if tax-saving is not a priority, FDs may suffice for your investment needs.

FD vs SIP: Which is the Right Choice for You?

When it comes to deciding between FD vs SIP, it completely depends on various factors such as risk appetite, financial goals, and investment horizon. Here are a few scenarios to help you make an informed decision:

  1. If you are risk-averse and seek stable returns with minimal risk, FDs may be a suitable option for you.
  2. If you have a long investment horizon and are willing to take calculated risks, SIPs can offer the potential for higher returns over the long term.
  3. If you require regular income to meet your financial obligations, FDs can provide a predictable income stream.
  4. If you want to build wealth over time and have the flexibility to increase or decrease your investments, SIPs may be a better choice.

Ultimately, assessing your financial goals, risk tolerance, and investment preferences is crucial before deciding. Consulting with a financial advisor can also provide valuable insights based on your specific circumstances.


When it comes to investing, choosing between FDs and SIPs requires careful consideration of your financial goals, risk appetite, and investment horizon. FDs offer stability and capital preservation, while SIPs provide the potential for higher returns and wealth creation over the long term. By understanding the differences between FD vs SIP, and the pros and cons of both investment avenues, you can make an informed decision that aligns with your financial aspirations. Remember, it’s always advisable to consult with a financial advisor to tailor your investment strategy to your unique circumstances.


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