How is SIP better than FD ?
Investing your hard-earned money is an important decision that needs careful consideration. There are various investment options available in the market, and two popular investment options are SIP and FD. SIP stands for Systematic Investment Plan, while FD stands for Fixed Deposit. Both investment options have their own advantages and disadvantages, but in this blog, we will focus on how SIP is better than FD.
Before we delve into the details, let's understand the basic difference between SIP and FD. SIP is an investment option where an individual invests a fixed amount of money at regular intervals in a mutual fund, while FD is a fixed investment option where an individual deposits a lump sum of money in a bank or a financial institution for a fixed period of time at a fixed rate of interest.
Higher Returns
One of the main reasons why SIP is better than FD is the potential for higher returns. SIP investments are made in mutual funds, which are managed by professional fund managers who invest in a diversified portfolio of stocks, bonds, and other securities. Mutual funds have the potential to generate higher returns compared to FD, which offers fixed returns at a fixed rate of interest. The rate of return on FD is currently around 5-6%, whereas the rate of return on mutual funds can vary from 10% to 20% depending on the market conditions.
Flexibility
SIP offers a lot of flexibility in terms of investment amounts and frequency. An individual can start a SIP with as little as Rs. 500 and can increase or decrease the investment amount as per their financial goals. The frequency of investment can also be chosen as per the investor's preference, ranging from monthly, quarterly, half-yearly, or yearly. In contrast, FD requires a lump sum investment for a fixed period of time, and the investor cannot withdraw the money before the maturity date without incurring a penalty.
Liquidity
Another advantage of SIP over FD is liquidity. Mutual funds are highly liquid investments that can be easily redeemed at any time. The redemption process is also quick and hassle-free, and the money is credited to the investor's bank account within a few days. In contrast, FD is a fixed investment that cannot be withdrawn before the maturity date, and if the investor needs to withdraw the money before maturity, they may have to pay a penalty.
Tax Benefits
SIP also offers several tax benefits, making it a better investment option compared to FD. Interest in equity-oriented mutual funds is qualified for an expense derivation of up to Rs. 1.5 lakh under Segment 80C of the Income Tax Act.. Additionally, long-term capital gains from mutual funds are taxed at a lower rate compared to FD. If an investor holds a mutual fund for more than one year, the gains are taxed at 10% without indexation or 20% with indexation, whereas FD interest is taxed at the investor's slab rate.
Diversification
Mutual funds offer a diversified portfolio of investments, which reduces the risk of loss due to market volatility. The fund manager invests the money in a mix of stocks, bonds, and other securities, which helps in spreading the risk across different sectors and companies. In contrast, FD is a single investment option where the entire amount is invested in one financial institution, which increases the risk of loss due to default.
Better Inflation Adjusted Returns
Inflation is a measure of the increase in the cost of living over time. As the average cost for many everyday items expands, the worth of cash diminishes. Hence, essential to put resources into a choice offers expansion changed returns. SIP investments provide better inflation-adjusted returns than FD due to the nature of investments made in mutual funds. Mutual funds invest in a diversified portfolio of stocks, bonds, and other securities, which offer the potential for higher returns compared to fixed deposits.
Inflation refers to the increase in the cost of living over time, which means that the value of money decreases. When the rate of inflation exceeds the rate of return on an investment, the real value of the investment decreases over time. This means that an investment that offers a rate of return that is higher than the rate of inflation will provide inflation-adjusted returns.
Equity-oriented mutual funds have historically provided returns that are higher than the rate of inflation. For instance, if the rate of inflation is 5%, and the mutual fund provides a return of 15%, the real rate of return is 10%, which is higher than the rate of inflation.
In contrast, FDs provide fixed returns that are predetermined at the time of investment. The interest rate on FDs is fixed for the entire tenure of the investment, which means that the real rate of return may decrease if the rate of inflation exceeds the interest rate. For instance, if the rate of inflation is 5% and the FD provides a return of 6%, the real rate of return is only 1%, which is much lower than the rate of inflation.
Moreover, mutual funds provide the flexibility to switch between funds based on market conditions, which helps to optimize returns and minimize the impact of inflation. Mutual funds also offer the option of systematic withdrawal plans (SWP) that allow investors to withdraw a fixed amount from their investments periodically, which can be useful in managing inflation.
In conclusion, SIP investments in equity-oriented mutual funds provide better inflation-adjusted returns compared to FDs due to the potential for higher returns and the flexibility to switch between funds based on market conditions. Mutual funds also offer the option of SWP, which can be used to manage inflation and optimize returns.
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