FD vs SIP: To Invest More Understanding for Investment? Understand the Whole Thing Here

March 29, 2025 By: Naresh Saini

Investing money is an important decision that affects financial security and growth. Fixed Deposits (FD) and Systematic Investment Plans (SIP) are two of the most common investment options in India. But many people struggle to decide which one is better. Should you invest in an FD for assured returns or go with SIP for higher growth? Let’s understand everything in detail.

What is Fixed Deposit (FD)?

Fixed Deposit (FD) is a traditional investment option where you deposit a fixed amount in a bank or financial institution for a fixed tenure. You earn a predetermined interest rate on your deposit, and the amount is locked until maturity. FDs are considered safe and stable investments.

Features of FD:

• Guaranteed returns with a fixed interest rate
• Tenure ranges from 7 days to 10 years
• Suitable for risk-averse investors
• Premature withdrawal is possible but with a penalty
• Tax on interest earned (if it exceeds Rs. 40,000 in a year for regular investors, Rs. 50,000 for senior citizens)

What is Systematic Investment Plan (SIP)?

SIP is a method of investing in mutual funds where you contribute a fixed amount every month. It allows investors to participate in equity or debt markets regularly without worrying about market fluctuations. SIPs are suitable for long-term wealth creation.

Features of SIP:

• Investment in mutual funds at regular intervals
• No fixed maturity period, flexible withdrawals
• Power of compounding helps in wealth creation
• Risk is higher as it depends on market fluctuations
• Can be started with a small amount (as low as Rs. 500 per month)

FD vs SIP: Key Differences

Feature	Fixed Deposit (FD)	Systematic Investment Plan (SIP)
Risk	Very low, almost risk-free	Market-linked, moderate to high risk
Returns	Fixed (5%-7% annually)	Variable, can go up to 12%-15% in the long term
Liquidity	Can withdraw early but with a penalty	Highly liquid, can be redeemed anytime
Tax Benefits	Taxable (except in Tax-Saver FDs)	Taxation depends on fund type and duration
Investment Type	Lump sum	Monthly or periodic investment
Best for	Conservative investors, short-term goals	Long-term wealth creation, high returns

Which One Should You Choose?

The choice between FD and SIP depends on various factors like risk appetite, financial goals, and investment horizon.

When to Choose FD?

• If you are looking for a safe and guaranteed return investment
• If you need the money within a short duration
• If you do not want exposure to market risks

When to Choose SIP?

• If you want higher returns in the long run
• If you can take some risk for better growth
• If you want to beat inflation and build wealth

Pros and Cons of FD and SIP

Pros of FD:

✔ Guaranteed and stable returns
✔ Safe from market risks
✔ Good for short-term goals

Cons of FD:

✘ Returns are low compared to inflation
✘ Premature withdrawal penalty
✘ Taxable interest earnings

Pros of SIP:

✔ High returns in the long run
✔ Flexibility to invest in small amounts
✔ Tax benefits in ELSS funds

Cons of SIP:

✘ Market risk, no guaranteed returns
✘ Long-term investment needed for good returns
✘ Returns fluctuate based on market conditions

Taxation on FD vs SIP

• FD Taxation: Interest earned is added to your taxable income and taxed as per your income slab. Senior citizens get an exemption of up to Rs. 50,000 per year under Section 80TTB.
• SIP Taxation: Short-term capital gains (STCG) tax of 15% applies if redeemed within one year. Long-term capital gains (LTCG) tax of 10% applies for gains above Rs. 1 lakh in a financial year.

The Power of Compounding: SIP vs FD

The power of compounding works better in SIPs because the returns are reinvested, leading to exponential growth. In contrast, FD interest is simple and does not multiply at the same rate.

Example:

• FD Investment: Rs. 10,000 per month for 10 years at 6% annual interest → Final amount: ~Rs. 16.3 lakhs
• SIP Investment: Rs. 10,000 per month for 10 years at an average return of 12% → Final amount: ~Rs. 23.2 lakhs

Clearly, SIP provides much better returns in the long run.

Conclusion: Which is Better?

FD is a safe investment option with guaranteed returns, while SIPs offer higher returns but with some risks. If you are risk-averse and need stability, FD is a good choice. If you are investing for long-term wealth creation and can tolerate market fluctuations, SIP is the better option. A balanced approach can be investing in both FD and SIP to ensure safety and growth.