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Fixed Deposits VS Mutual Fund SIP’s

Fixed Deposits VS Mutual Fund SIP’s

When it comes to saving money, people often opt for fixed depositss, considering them to be risk-free. But is it really going to grow your money? In the current scenario, what is a better?  Fixed Deposits  or investing in Mutual Funds through Systematic Investment Plan (SIP)? Let’s find out

What is a Fixed Deposit?

A fixed deposit is a fixed interest-bearing investment option provided by banks, NBFCs (non-banking financial corporations), post offices and companies. It needs to be held for a fixed duration with the offering entity. Fixed Deposits offer a higher rate of interest than a regular savings account. Investment in fixed deposits is a safer option compared to other investments and is relatively easy to open. But FDs are used more as a savings tool and less as an investment because your money is safe and secure but the growth is muted.

What is a Systematic Investment Plan?

A Systematic Investment Plan or SIP is a smart and hassle-free method of investing money. These plans allow investors to invest a pre-determined amount at regular intervals (weekly, monthly or quarterly) in mutual fund schemes. Through these plans, you can get an exposure in equity, debt and commodities (gold). And since professionals invest money on your behalf, you don’t need to worry about being a financial expert while investing. A SIP is a planned approach towards investments and helps you inculcate the habit of saving and building wealth for the future.

How do FDs work?

FD’s are fairly simple, they work like a regular bank account. You can select any one of the below-mentioned plans.

1. Traditional or Non-Cumulative Plan
Under this plan, the principal amount is invested for a particular period chosen by the investor and the interest is paid on monthly, quarterly, half-yearly or annual basis depending on the interest payout option selected by the investor.

2. Reinvestment / Cumulative Plan
Under this option, interest is compounded on a quarterly basis and is reinvested along with the principal amount. The accumulated amount is then paid out at the time of maturity.

How do SIPs work?

An SIP is a flexible and easy investment plan whereby a pre-determined amount is deducted from your bank account and invested in a particular mutual fund scheme. Each time the money gets deducted a certain number of units of that scheme are bought based on the ongoing market rate called NAV (Net Asset Value). Since the NAV of mutual funds fluctuates every day sometimes you’ll get more units of the scheme and sometimes you could get less. In short, units are bought at different rates and the investor benefits from averaging. Another benefit of SIPs is compounding meaning any interest earned is reinvested back.

Features of FDs-

1. Fixed interest rates: FDs offer a fixed rate of interest based on the tenure The interest rate varies from banks to banks and is calculated on a monthly, quarterly or annual basis.

2. Minimum and Maximum Amount: The minimum deposit required to open a FD varies from banks to banks and ranges between Rs.1000 to Rs.10,000. There is no upper limit.

3. Tenure: FDs give you the flexibility to choose the tenure and depending on who issues it they could be anywhere between 7 days to 10 years.

4. Premature Withdrawal: Banks provide premature withdrawal in part or full to the investors. However, a penalty is placed on the withdrawal.

5. Nomination Facility: Nomination facility is available to the investor at the time of opening the FD. You can add or modify the nominee details at any time later.

6. Loan against FD/ Overdraft Facility: An investor can avail a loan against FDs but the interest rate on the loan will be a little higher than FD interest rate.

7. Safety of Deposits: FDs with banks and post office which fall directly under the government are insured up to Rs.1 lac. This amount includes the principal as well as the accumulated interest.

8. Taxation: Interest on FDs are taxable as per your income tax slab. In addition to this, if the yearly interest on an FD exceeds Rs.10,000 in a financial year, banks will deduct TDS (Tax Deducted at Source) at the rate of 10% on the interest earned if PAN is submitted and 20% if PAN not submitted.

Pro Tip- Investors can avoid TDS on FDs by submitting form 15G and senior citizen should submit form 15H while filing income tax returns.

9. Tax Saver FD: Banks also offer Tax saver FDs. The tenure for such FD is 5 years and the maximum deposit in a financial year is Rs.1,50,000. An investor can opt for monthly or quarterly interest. An investor is eligible for tax benefit under Income Tax section 80C.

Features of SIP:

1. Benefits of averaging: In volatile markets, investors remain sceptical about the right time to invest and try to time the market. SIP allows the investors to average out the units as they are regular in the market.

2. Power of Compounding: The rule of compounding is simple- the sooner you start investing, the more time your money has to grow.

3. Disciplined Savings: Discipline is the key to successful investments. When you invest through SIP, you commit yourself to regularly saving. Every investment is a step towards attaining your financial goal.

4. Flexibility: While it is advisable to continue SIP investments with a long-term perspective, there is no compulsion. Investors can discontinue the plan at any time. One can also increase or decrease the amount being invested.

5. Long-term gains: Due to averaging and power of compounding SIPs have the potential to deliver attractive returns over a long investment horizon.

6. Convenience: SIP is a hassle-free mode of investment. You can issue a standing instruction to your bank to facilitate auto debit from your bank account into mutual funds. Moreover, SIPs can be started with as low as Rs.500 and there is no upper limit.

7. Exit Load: Mutual Fund offers high liquidity on the condition that the minimum holding period has passed and subject to lock-in period as applicable. If an investment is withdrawn within a short duration (under a year), an exit load may be charged. Some MF schemes allow withdrawals at any given point of time, without any exit load or extra charges.

8. Tax Benefit: The tax on MF returns depends on its category and how long they are held for. For instance, short-term equity mutual funds are charged a 15% interest rate. It’s best to consult a CA to understand how much tax will you be charged before investing in mutual funds.

A brief summary of FD vs SIPs-

  • During positive market conditions, MFs have the potential to earn high returns whereas FD rates are unaffected.
  • Concerning risk, equity MF carry high market risk whereas FDs are almost risk-free.
  • An investor can design his portfolio based on his risk appetite or even diversify to manage risks better.
  • MFs are professionally managed, who do their best to protect investors investments and also to grow it.
  • Meanwhile, FDs have a fixed period and little liquidity.

There is a price that you pay for certainty hence FD will always give lower returns than SIP Equity in Long Term.  SIPs have proved to be an ideal mode of investment for the retail investor who does not have the resources to pursue active investments. In the end, the decision to invest between an FD and MF SIP is based on the risk capacity and the horizon of the individual.

Got any more questions for Tanvi? Email them to us at hello@missmanage.com and we will answer them right away.

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Tanvi Parikh is an Investment Management graduate who has been managing finances for her friends and family for the past 7 years.

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