Fixed Deposit vs SIP

With numerous investment options out there, selecting the right one can be tough. A frequent question that comes up in everyone’s mind is between SIP vs FD—which option works better. While both are widely used, they serve distinct financial purposes. Therefore, understanding this distinction is essential to determine which might be the right fit for your goals.

What Is SIP?

A Systematic Investment Plan (SIP) lets you invest a set amount of money at regular intervals in equity or debt mutual funds. SIPs are a great starting point if you are new to market investments and prefer not to commit a large lump sum all at once.

SIPs are goal-focused, encouraging you to save consistently in a disciplined manner. Additionally, if you hold your SIP for over a year, you may also enjoy tax benefits on your investments.

Key Features of SIP

The following are the key features of SIP:

With a SIP, you can regularly invest small amounts in a mutual fund, with payments auto-debited from your bank account monthly, quarterly, bi-annually or annually. Just ensure there are enough funds in your account.
SIP helps you build an investment habit and eases the pressure of making large lump-sum contributions.
Unlike fixed deposits, SIPs in mutual funds offer higher potential returns over the long term, making them a good option for wealth building.
Investing consistently through SIP over time allows returns to grow on both your initial amount and prior earnings, amplifying the benefits through compounding.
You can choose SIP investments across various mutual fund types, such as equity, hybrid or debt funds, depending on your financial goals and risk preference.
SIPs offer the advantage of rupee-cost averaging, as you invest a fixed amount regularly. This lets you buy more units when prices are low and fewer when prices are high, reducing the average cost per unit.
You can start a SIP with as little as ₹100 per month, minimising the need for a lump sum investment.

What Is FD?

A Fixed deposit or FD is a popular investment option provided by banks, where you deposit a specific amount for a set duration. In return, the bank offers a fixed interest rate on your deposit, which is generally higher than what a standard savings account provides.

FDs are seen as a secure investment choice, as they guarantee returns and are protected by government insurance up to a certain limit. However, withdrawing funds before the end of the term may result in a penalty.

Key Features of FD

The following are the essential features of fixed deposits:

Fixed deposits give guaranteed returns with fixed interest, making them ideal for investors who prefer minimal risk. At the end of the term, the principal amount is returned.
Based on interest payout frequency, FDs are classified as cumulative and non-cumulative. In cumulative FDs, interest is paid as a lump sum at maturity, while non-cumulative FDs pay interest periodically, such as monthly, quarterly, half-yearly, or annually.
FD tenures are flexible, ranging from 7 days to 10 years, with interest rates typically between 3% to 8% depending on the duration.
Senior citizens aged 60 and above may receive higher interest rates on FDs.
You can choose the FD tenure based on your liquidity needs.
Tax deductions are available on investments up to ₹1.5 lakh in tax-saving FDs with a 5-year term, under Section 80C of the Income Tax Act, 1961.
Interest earned on FDs is taxable according to your income tax bracket, and TDS is applicable on interest income.
FDs can also serve as collateral to secure a loan.

Comparison of SIP vs FD

The following table shows a comparison of Systematic Investment Plan vs fixed deposit:

Parameters	Systematic Investment Plans (SIP)	Fixed Deposits (FD)
Investment Nature	Investment through periodic contributions	One-time lumpsum investment
Return	Market linked returns	Assured returns
Type of Return	Profits from capital gains and dividends are accrued based on the invested amount	Interest is generated based on the amount invested
Liquidity	Easily withdraw funds without affecting the market value but exit fees are applicable	Comes with a lock-in period and includes a penalty for early withdrawal
Tenure	Does not have a fixed tenure	A few days to several years
Suitability	Ideal for individuals with mid-term and long-term investment goals	Ideal for individuals with different types of goals
Risk level	Moderate to high-risk	Low-risk
Taxation	Applicability of long-term and short-term capital gains tax	Tax imposed varies based on the income tax bracket of the investor

SIP or FD: Which Is Better?

When deciding between SIP vs FD, consider your risk tolerance, investment amount and goals. FDs are ideal for those seeking capital preservation and guaranteed returns with a lump sum deposit for a fixed term. In contrast, SIPs offer flexibility, allowing you to invest in mutual funds through monthly instalments, with the potential for higher returns, albeit with some risk.

If you are looking for steady, low-risk returns, FDs are a better fit. However, if you seek higher long-term growth and can manage some risk, SIPs might be the right choice. Ultimately, the decision depends on your financial objectives and comfort level with risk.