When it comes to investing, two popular options are Systematic Investment Plans (SIPs) and Fixed Deposits (FDs). While both offer a safe and stable way to grow your wealth, SIPs have several advantages over FDs. In this blog, we’ll explore why SIP is Better Than FD and a better choice for investors.
Why SIP is Better than FD?
A Complete Guide to SIP: Types, Benefits, and How It Works
https://thebullbook.in/a-complete-guide-to-sip/
Higher Returns Potential
- SIPs: Invest in equity or mutual funds, which typically offer higher returns over the long term. While market risks exist, the potential for wealth expansion is much greater.
- FDs: Offer fixed returns, which are generally lower compared to equity-based investments. FD interest rates often struggle to beat inflation.
Inflation Beating
- SIPs: Investments in equity or mutual funds have historically outperformed inflation in the long run, protecting your purchasing power.
- FDs: Though FDs are risk-free, their returns often barely match or fall short of inflation, reducing the real value of your money over time.
Also Read : FD Calculator – Saving Calculator https://thebullbook.in/fd-calculator-saving-calculator/
Tax Efficiency
- SIPs:
- If you sell after holding for over 12 months, the long-term capital gains (LTCG) tax rate is 12.50%. However, there is some relief, as LTCG tax only applies to gains exceeding Rs 1.25 lakh.
- The tax rate is 20% for short-term capital gains (STCG), which apply when you sell equity funds before 12 months.
- FDs: The interest earned on FDs is taxed according to your income tax slab, which can significantly reduce the post-tax returns, especially for those in higher tax brackets.
Flexibility and Liquidity
- SIPs: Offer higher liquidity, allowing you to withdraw or stop contributions as needed. You can start or stop a SIP anytime without penalties.
- FDs: Breaking an FD before maturity often results in a penalty, reducing the overall returns. There’s also less flexibility in adjusting the investment once locked in.
Power of Compounding
- SIPs: With regular contributions, SIPs benefit from the compounding effect, especially in long-term investments. Compounding in equity markets can yield exponential growth over time.
- FDs: Although FDs also offer compounded interest, the lower rate of returns limits the power of compounding compared to SIPs.
Market Participation
- SIPs: Allow you to benefit from market fluctuations through rupee cost averaging. You buy more units when prices are low and fewer units when prices are high, which can smooth out market volatility over time.
- FDs: These are not market-linked, providing fixed returns regardless of economic or market conditions. While this reduces risk, it also limits growth opportunities.
Top performing Mutual Funds in Last 5 Years
| Fund Name | 3 Years Return | 5 Years Return |
|---|---|---|
| Nippon India Small Cap Fund (G) | 31.5% | 38.5% |
| Tata Small Cap Fund (G) | 28.3% | 34.4% |
| Motilal Oswal Midcap Fund (G) | 36.8% | 34.2% |
| Bank of India Manufacturing & Infrastructure Fund (G) | 29.3% | 33.1% |
| SBI Contra Fund (G) | 28.5% | 32.9% |
FAQs:
What is the minimum investment required for SIP?
The minimum investment varies depending on the scheme, but it’s typically as low as ₹500.
What is the rule of SIP?
The 8:4:3 rule suggests allocating 80% of SIP investments to equity funds, 40% to mid-cap funds, and 30% to small-cap funds.
Is SIP 100% safe?
Yes, SIP is a very safe method to invest in mutual funds
Conclusion
SIPs offer flexibility, compounding benefits, risk management, liquidity, and tax efficiency, making them a better choice than FDs. While FDs provide fixed returns, SIPs have the potential for higher growth and wealth creation. Consider SIPs for your long-term investment goals, such as retirement planning, education expenses, or buying a dream home.
