SIP vs FD: Which Is Better For Investment In 2025?
An investor will always incline towards higher returns, but what about the associated risk that follows? Over the years, investors have been introduced to various financial instruments that vary in risk, return, investment horizon, and goals. This article focuses on two investment routes - SIP vs FD.
A fixed deposit (FD) is the foremost savings tool that every risk-averse retail investor prefers. An investor looking for a stable investment avenue and limited risk tolerance would ideally like to invest in FDs.
On the other hand, Systematic Investment Plans (SIPs) build a smart investment approach for investors, where they plan and regularise payments into a mutual fund scheme. However, this also exposes them to considerable risk.
We discuss the advantages and disadvantages of both and how you can decide SIP or FD which is better suited for you.
What Is SIP?
SIP is a systematic method of investing that accepts regular payments of a predetermined amount into a mutual fund scheme. This facility cultivates a habit of disciplined investing in investors and allows them to build wealth over longer periods.
SIP serves as a hassle-free process that permits automation in investments. Once the investors have invested in a mutual fund through SIP, they can sit back while the pre-determined amount gets invested as per the schedule.
SIP is ideal for investors seeking budget-friendly investment options. Investors can begin a SIP with as little as INR 100, thus making it more convenient than lump sum investing.
Due to the numerous benefits offered by SIPs, the contributions towards them have been rising steadily.
Advantages Of SIP
The core benefits that underline SIPs make them an impressive form of investment.
1. Rupee Cost Averaging (RCA)
SIP benefits an investor by offering an average cost for all the units allotted across multiple periods. This benefit is unique to a SIP. With rupee cost averaging benefit, investors need not time the market. They can keep investing consistently through SIPs and the cost of purchasing those units keeps getting averaged out.
To understand how this works, let us look at an example: Assume, an investor wants to invest INR 1000 for 6 months in an SIP mutual fund.
Month | Invested amount (fixed amount each month) In INR | NAV of the fund (fluctuating) In INR | No. of units allotted = (Invested amount/ NAV) | Cumulative units allotted | Total Investment value = (Cumulative units*Current NAV) In INR |
0 | 1000 | 50 | 20 | 20 | 1000 |
1 | 1000 | 55 | 18.18 | 38.18 | 2100 |
2 | 1000 | 52 | 19.23 | 57.41 | 2985 |
3 | 1000 | 48 | 20.83 | 78.24 | 3756 |
4 | 1000 | 45 | 22.22 | 100.46 | 4521 |
5 | 1000 | 50 | 20 | 120.46 | 6023 |
6 | 1000 | 56 | 17.86 | 138.32 | 7746 |
As you can see from the above table, the investor receives units based on the NAV at the time of allotment.
With a fixed amount being invested monthly, investors reap the benefit of averaging out the cost through SIPs. This means more units are allotted when the NAV is lower and fewer units when it is higher.
2. Systematic Investment Approach
Investing in SIPs is a disciplined form of investment, promoting regular contributions to the scheme. This method routes an investor towards a long-term focus by encouraging discipline along with an instilled habit of investing.
3. Cost-Effective
SIP investments are considered a low-cost investment option available in mutual funds. A SIP can be started with an initial investment of as low as INR 100.
Through this disciplined approach, SIPs take the burden of timing the investments off the investor. This also reduces the timing risk that may be associated with self-investing.
4. Compounding Benefits
The power of compounding in SIPs allows the growth of their investment fund, exponentially rather than linearly. This process refers to earning an interest on the interest-earned investment amount, year over year. Investors who stay invested for the long term can unlock substantial gains through the power of compounding.
Disadvantages Of SIPs
1. Not Ideal For The Short-Term
SIPs are generally suited for long-term investment horizons. If you have short-term goals, SIPs may not give the desired returns due to market volatility.
2. Market-Linked Risk
Since SIPs are primarily tied to the stock market, they inherently carry some level of risk. If the market underperforms, your returns may suffer.
3. No Guaranteed Returns
Unlike fixed deposits, SIPs do not offer guaranteed returns. The performance is entirely dependent on the underlying mutual fund and market conditions.
What Is An FD?
A fixed deposit is a type of savings product that is commonly viewed as a safe approach to earning profits. It involves a one-time investment for a set duration at a predetermined interest rate.
When a person makes a deposit under an FD scheme, the amount deposited is called the principal, and such principals earn interest for the whole period of the FD. There can, however, be a restriction on accessing the amounts deposited prior to the specified date for which a penalty shall be charged.
Advantages Of FD
1. Assurance Of Returns
The most noteworthy favourable aspect of FDs is the security of the principal amount and the assurance of profit from its investments. There are very rare chances of default.
2. Low Risk
FDs rank among the least risky options in the investment spectrum. This is because they are not linked to any market trends, and most are usually covered by government insurance to a limit of INR 5 lakh for each account holder under the Deposit Insurance and Credit Guarantee Corporation (DICGC).
3. Flexible Tenure
FDs are associated with a lot of tenure choices, making them appropriate for both short-term and long-term objectives.
4. Tax on capital gains
Depending on which category of mutual funds you have done SIP in, such as equity, debt or hybrid funds, your capital gains would be taxed as per the applicable rules. The applicable tax would also depend on whether it's a short term or long term capital gain.
Disadvantages Of FD
1. Returns Are Often Lower
When compared to the returns gained through SIP in mutual funds, fixed deposits generally tend to have a lower return, especially during inflationary times when the real returns (after inflation) can be extremely low.
2. Taxable Interest
Interest earned on FDs are added to an individual’s tax slab and thus taxed accordingly. If a person falls in the 30% tax bracket, they will have to pay a higher tax. Also, 10% TDS on FD interest is charged on income more than Rs 40,000, if the depositor is less than 60 years of age. For senior citizens, i.e. people above 60 years of age, TDS on interest on FD is levied if the interest income exceeds Rs 50,000 in a financial year.
3. Liquidity Constraints
Although FDs permit early withdrawal of funds, they usually attract some form of charge, and you might also receive a lower rate of returns.
Case Studies On SIP And FD Returns
Real-life scenarios show how theoretical returns convert into real-life growth. Here are two case studies that demonstrate the SIP or FD which is better:
Case Study 1: SIP Advantage of X
X is a 30-year-old marketer who invested 10,000 INR monthly in an equity SIP, besides having some of his savings in FDs. His FDs had grown 6 percent per annum to 20 lakhs in approximately 11 years. Whereas, his SIPs did better with growth to 30 lakhs. It illustrates how SIPs take advantage of the market expansion to grow faster, and the stable returns promised by the FD.
Case Study 2: The Time And The Long-Term Discipline
The investor who invested in SIP started in January 1990 and was able to invest 1000 rupees per month over the same duration of 31 years until the year 2020. Even though the beginning was busy during ancient times, in regard to instability with 1.8% CAGR. The amount began to soar so as to provide 10-15% CAGR within 30 years. It shows that frequent investment does win over timing the market and bear market recovery.
Difference Between SIP And FD
While SIPs and FDs serve different purposes, they both cater to specific financial needs. Here is the difference between FD and SIP.
Criteria | SIP | FD |
Returns | Market-linked, potentially higher | Fixed and guaranteed |
Risk | High (market volatility) | Low (safe and secure) |
Investment Amount | Flexible, minimum varies by AMC | Lump sum, minimum varies by bank |
Tenure | No fixed tenure, can invest for long term | Fixed tenure depending on the financial institution |
Taxation | Taxed on gains (capital gains tax) | Interest is fully taxable, and TDS is applicable if interest exceeds a threshold limit |
Liquidity | High (can stop anytime and redeem for most schemes) | Lower penalty for premature withdrawal |
Taxation Differences Between SIP And FD Explained
Understanding how SIPs and FDs are taxed helps investors choose the right option for their goals. Here is a clear comparison to help you make an informed decision on SIP vs FD:
Aspect | SIP Taxation | FD Taxation |
Type of Tax Applied | Returns from SIPs are taxed as capital gains. | Returns from FDs are taxed as interest income under your income slab. |
Short-Term Tax Treatment | If you sell equity SIPs before 12 months, the gain is taxed at a flat 20%. | Interest earned every year is added to your income and taxed accordingly. |
Long-Term Tax Treatment | If you sell SIP units after 12 months, gains above INR 1 lakh are taxed at 12.5%. | There is no long-term benefit, as interest is taxed each year at the slab rate. |
TDS Deduction | SIPs do not have any TDS, but you must report gains in your ITR. | Banks deduct 10% TDS if interest exceeds INR 40,000 (INR 50,000 for seniors). |
Indexation Benefit | Indexation is not available for equity SIPs. | Indexation does not apply to FDs, as interest is taxed annually. |
SIP vs FD Performance In Bull And Bear Markets
There are differences between FD and SIP in how they are impacted by market conditions. FDs have set returns regardless of market conditions, while SIPs can be great in bull market conditions and can go down in bear markets.
Here is a comparison table showing how a INR 10,000 SIP and a INR 10,000 FD perform in different market scenarios, so you get to know SIP or FD which is better:
Market Scenario | INR 10,000 FD (interest 6.5%) | INR 10,000 SIP (equity returns) |
Bull Market | INR 649 after 1 year (6.5%) | INR 11,500 (15% growth) |
Flat Market | INR 649 (same 6.5%) | INR 10,600 (6%–7% average) |
Bear Market | INR 649 | INR 9,500 (–5% decline) |
When To Use SIP And FD Together For Better Returns
A combination of SIPs and FDs will provide both stability and growth trade-offs. In sum, they are within the short-term and long-term financial aims.
1. Keep 3-6 months' expenditure in the form of FDs so that you can deduct when you have short-term needs. This will make you not break the SIPs even in a downtrend in the market, and the money invested will not be wasted.
2. Establish a low-risk income on FDs. They offer safe returns (5 to 7 percent) and security of the capital in a period when the equity market is in some way shifting.
3. Use the surplus savings as an equity SIP to achieve long-term targets. Rupee cost averaging and compounding with a 10-15% rate of return are some of the aspects of the SIPs.
4. Increase your FD in case the phase is volatile, and in case the market declines, then increase your SIP contributions and average when the prices are down.
5. Apply a flexi or a sweep-in FD to get further interest during a bull period in order to retain instant money. This will allow the excess to compound, and there will be ready cash in hand.
FD Vs SIP: Which Is Better For You?
The decision of SIP vs FD depends on an individual's:
- Financial goals,
- Risk appetite, and
- Investment duration
If one has a low-risk appetite, then FDs would be better as they provide safety and a guaranteed return on investment at the end of the investment period. On the other hand, if you can afford to take the risk, SIP provides a better option for growth than an FD.
Apart from risk, if one is looking for flexibility, SIPs can be a better option as one can start it, pause it, or stop it anytime, as opposed to an FD, which has a predetermined duration and any withdrawal before the set period incurs penalties.
The imposition of tax could be another reason that will help in ascertaining which of the options would be preferable to the other. In the case of SIPs, one is liable to capital gains taxation. Whereas interest earned on FDs is taxable as per the individual's slab rates.
Conclusion
Finally, the decision of which investment option to take, SIP or FD, is dependent on one’s financial objectives, investment risk, and duration of the investment.
SIPs can offer better potential returns but come with market risk. FDs are more secure and provide returns that are fixed but limited to growth. Ideally, the combination of SIPs and FDs can maximise the chances of wealth creation and provide a safety net.
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Frequently Asked Questions On SIP VS FD
1. Is interest on FD taxable?
Yes, the interest earned on fixed deposits is taxable per your income tax slab. If the interest exceeds INR 40,000 in a financial year (INR 50,000 for senior citizens), banks are required to deduct Tax Deducted at Source (TDS) at 10%.
2. What are the minimum days for FD?
The minimum tenure for an FD is usually 7 days. Nonetheless, specific periods for minimum and maximum tenure will still differ for each bank or financial institution.
3. What is the 15-15-15 rule in SIP?
The 15-15-15 rule under SIP explains that an average investor investing INR 15,000 every month in a mutual fund with a return of 15% per annum for a period of 15 years stands to gain roughly INR 1 crore, emphasising on the benefit of compounding effects in SIP investments.
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