Various types of investment plans and avenues are available which makes the investment decision a difficult process for beginners and experienced investors. Out of all the investment options, investors stay confused between the two investment vehicles which are SIP and fixed deposits.
A systematic investment plan or SIP involves regular monthly, quarterly, or yearly investments in various mutual funds. Investors use a SIP mutual fund calculator to identify the SIP investment amount and total returns they can generate through consistent investments. An investor on the other hand has to deposit of a fixed amount for a FD in lump sum in the beginning of a year with a financial institution like banks for fixed returns. Considered to be a safer option, fixed deposits are opted by risk-averse investors who wish a lump sum amount with fixed returns.
The following comparison between SIP and fixed deposits based on various aspects can help investors in making the right decision:
1. Investment amount
SIP involves consistent monthly, quarterly, and even yearly investments of an amount decided by an investor to reach their financial goals. The amount can be one time or systematically invested across different periods. Moreover, investors can decide the total amount they wish to invest through SIP investment. SIP mutual fund plans help with easy investment starting from ₹500 per month. On the other hand, fixed deposits involve investment of a fixed lump sum amount like ₹1,00,000 which is then locked in for a certain period like 1 to 5 years.
2. Total returns
Systematic investment plans are known for their volatile returns. Investors gain variable returns which can increase and even decrease depending upon the market sentiment. However later, in the long run, SIP investment helps investors generate returns between 11 to 16% depending upon the performance of their selected mutual fund. On the other hand, fixed deposits upon maturity help investors’ returns between 7 to 9% that are fixed by financial institutions. The investors get their hands on a fixed amount upon completion of the fixed tenure which cannot be altered.
3. Liquidity
Systematic investment plans and fixed deposits can also be differentiated based on the liquidity they offer to the investors. SIP investment plans offered high liquidity as compared to fixed deposits. Investors receive the option to withdraw their investments at any time. Certain mutual fund charges a small percentage as an expense for early withdrawal. Moreover, investors can withdraw their investment amount without any penalties if they fulfill the minimum investment period ranging between 15 days to 30 days. Fixed deposits however do not offer much liquidity to the investors. Once invested, investors do not receive the option to withdraw their invested amount. Also, premature withdrawal results in a penalty that investors must pay.
Conclusion
Investors can select the best investment avenue i.e., SIP and fixed deposits depending upon their ultimate financial goals, and risk-taking capacity. Fix deposits are suitable for risk-averse investors while investors with risk-taking capacity can opt for systematic investment plans. An investor can even use an FD calculator along with a SIP calculator to identify the best investment avenue that fits his needs, financial goals, and overall risk tolerance.
