FD vs SIP: Which is better for long term investment?
Usually there are two types of investors – those who are completely risk averse and those who wish to give their investment portfolio an aggressive approach by investing in market linked schemes. Whether you should invest in conservative schemes or aggressive schemes will totally depend on your risk appetite. A risk appetite is nothing but an individual’s ability to take a certain amount of risk so that they stand an opportunity of receiving capital appreciation at some point of time in future. An individual’s risk appetite may depend on various factors like their age, income, existing liabilities, etc.
Mutual funds and fixed deposits are two ways for investors to grow their savings into a wealthy corpus. However, what is a better investment – SIP in mutual funds or bank FDs (fixed deposits)? In order to determine that, we need to first understand the difference between the two.
SIP in mutual funds
Mutual funds are a modern investment tool that is being considered by both young and seasoned investors as well. Even some conservative investors who have been sticking to traditional investment schemes are slowly shifting to mutual funds because of several reasons. Mutual funds are supposed to carry a diversified portfolio and at the same time, these funds also offer active risk management for investors.
Fixed Deposit in banks
A bank FD (fixed deposit) is one of the oldest investment avenues that is generally offered by banks as well as post offices. When you invest in a bank fixed deposit, you pay the entire investment amount in lump sum right at the beginning of the investment cycle. Investors can withdraw their investment amount at the end of the maturity period. Investors are not allowed to break their bank FD during the tenure. And if they do, there will be some charges levied by the bank.
What is a better SIP or FDs?
Investing mutual funds through SIP has its own advantages. Those who are new to investing or mutual funds in general can opt for the SIP option. That’s because there are some mutual funds that offer investors to start a monthly SIP with an amount as low as Rs. 500. This way every individual gets a chance to invest in mutual funds. Even someone with a monthly salary of Rs. 10,000 can invest in a mutual fund through SIP and reap its long term benefits through systematic investment. Another benefit of starting a mutual fund SIP is rupee cost averaging. Now you must be aware the mutual funds have NAV (net asset value). Depending on the performance of a mutual fund the value of its NAV may rise/fall. When you invest in mutual funds through SIP, every monthly investment is almost a new investment. That’s because the fund’s NAV keeps fluctuating in tandem with market movements. Hence, when the NAV is low, investors are allotted more units. Similarly, when the NAV of the mutual fund is high investors are allotted lesser units. This is referred to as rupee cost averaging.
Bank fixed deposits on the other hand offered fixed interest rates. The current interest rates by banks on FDs is somewhere between 5 to 7.25%. That is low by all standards. How can one expect to achieve their long term goals by investing all their savings solely in bank FDs? Also, in case of emergency investors cannot withdraw their FD. But in case of mutual funds there is no lock-in (except ELSS and few other schemes). Investors can withdraw their mutual fund units according to their own convenience.
Now that you know the difference between a mutual fund SIP and bank FD, where are you planning on investing? SIP is a modern way where a fixed deposit is a traditional way of investing. No matter where you invest, make sure that your investment goal aligns with the financial scheme’s investment objective.
Mutual fund investments are subject to market risks, read scheme related information carefully.