Systematic Investment Plan vs Fixed Deposit- Which One is a Better Investment Option?

Choosing between new and existing financial instruments is always a bit perplexing. Whether it's the latest trend of cryptocurrency or mutual funds, or safe investment options like Fixed Deposits (FDs) and Government Bonds, the options available today are far greater than in the past. It is common for people who want to invest their money to be perplexed about which options are best for them. Fixed deposits and systematic investment plans are the two investment options that have numerous advantages and a lot to offer investors. Take a look at Systematic Investment Plan vs Fixed Deposit, key differences.

What is a Fixed Deposit?

A fixed deposit is a type of financial instrument offered by both non-banking financial institutions and banks. An investor invests a lump sum at a fixed interest rate for a specified period of time. It is one of the safest investment options available in the market because it guarantees higher returns on the investor's investment. Non-banking financial companies and banks offer various types of fixed deposits to meet the needs of investors for short-term and long-term goals. Fixed deposits have a number of advantages. The best thing about fixed deposits is that the returns on your investment are guaranteed. Fixed deposits are tax-free investment vehicles. Fixed deposits offer flexibility because investors can choose the time period and amount that best suits their needs. In the event of an emergency, an investor can easily close the FD and withdraw the funds via overdraft. If you invest in tax-saving fixed deposits for five years, you will be eligible for a variety of tax breaks.

What is a Systematic Investment Plan?

A Systematic Investment Plan (SIP) is simply a mutual fund investment product that allows for small monthly investments in equity and debt instruments. SIPs are a great way to get started in the world of mutual funds. Aside from providing good returns, investing in SIPs can help instill the habit of timely investments, which will eventually result in the individual acquiring a substantial sum of money in a short period of time. Investing in systematic investment plans has a number of advantages. The investment can be made based on the investor's requirements. The investor can easily monitor the performance of his or her investments. It is relatively simple to invest in a SIP without roaming here and there. If you invest in a SIP for more than a year, you may be eligible for tax breaks. SIPs allow you to invest in open-ended funds, which allow you to withdraw and invest money at any time.

Key Differences Between FD and SIP-

Tax: When it comes to the important topic of tax savings, most FDs are taxed based on the income tax bracket in which the investor falls. A tax saving FD is one that allows an investor to claim a deduction of Rs. 1.5 lakh. As with SIPs, though no tax is levied if the mutual fund units are sold after a year, the investors must pay a percentage of the tax.

Investment: SIP investments are made in installments, whereas fixed deposits are made in one lump sum. Looking at the investment options available to potential investors in terms of SIPs and FDs, it is simple to begin investing in both financial instruments. However, when it comes to SIPs, it is comparatively easier because one can start with a small amount and still have a chance to earn higher returns.

Interest: In comparison to fixed deposits, the interest rates offered to investors through systematic investment plans are higher. As a result, when it comes to guaranteed returns, investing in SIPs is entirely dependent on chance. In the case of FDs, the investor is guaranteed to receive higher returns regardless of the amount invested.

Though FDs are the safest option for investors when it comes to investing their hard money without hesitation, investing in mutual fund SIPs can also be beneficial if the decision to invest is made after considering all risks. With banks recently lowering interest rates on FDs, both conservative and assertive investors can do prior research on investing in mutual fund SIPs, which can result in higher returns on investments made.