Though most people invest in both the options, if you are looking for an answer as to which is better, then you should first understand what these investment vehicles are.

What are SIPs?

A Systematic Investment Plan, or SIP, refers to a mode of investment where funds are invested in equity or debt-related securities. The most common investment for SIPs is Mutual Funds. The rate at which the interest is accrued depends on any floating rate such as LIBOR, MIBOR, 90-Day T-Bills, etc.

What Is a Fixed Deposit?

fixed deposit is a form of investment in which funds are deposited with a bank for a set tenure and earn an income in the form of interest earned. FD interest rate is at the time the borrower invests in the scheme, and it remains fixed for the entire tenure.

Methods of Measurement

Both SIP and FDs are beneficial, but they are created for people with different risk appetites and financial goals. It is, therefore important to know how to measure the return on your investment. There are three methods of measurement that you need to know – investment and returns, tenure and taxation, and risk and liquidity.

Investment and Returns

In the case of SIP, there is no fixed rate of return. Depending on the market, the payable rate of interest will fluctuate. It makes it hard to predict the total earnings after the end of a certain period – whatever amount the Fund’s representative tells you is just a prediction. It is the exact opposite for FDs. Since the interest rate is flat, you can predict the total earnings you are entitled to at the time of maturation.

Investments in SIP start at as low as Rs. 500/month. Some POS advertise for SIPs at as low as Rs. 100/month. FDs, on the other hand, require a significantly higher sum compared to SIPs. The average minimum amount ranges between Rs. 1,000-5,000.

Tenure and Taxation

Staying profitable from SIPs requires a long-term investment, usually 3-5 years. It is done so that the price fluctuations can even out and settle down, creating a perceptible usually earning between 8-15%.

FDs, on the other hand, can earn interest within seven days. If you take a longer duration FD, then you can enjoy higher FD ratesThe rate of interest payable to you will be divided proportionally and can be claimed as a source of regular income. .

SIPs fall under the category of capital gains. If you sell the securities before one year, it constitutes short-term capital gains and is taxed at 15%. If the investment is held for more than one year and then sold, the rules of longterm capital gain are applied to it, which is taxed at 10%. 

In the case of FDs, the interest amount for Indian citizens is exempt up to Rs. 10,000. If the amount exceeds that, then the rate of interest will depend on the submission of PAN details

Risk and Liquidity

FDs are considered the safest assets. They are the base for calculating risk-adjusted rates of interest. In SIPs, however, since the interest rate fluctuates constantly, the risk of principal return is high.

The liquidity component involves knowing when to request funds. Since the FD has fixed rates, requesting to close the FD at any time will give you the same interest. For SIPs, since the interest is fluctuating, requesting at the right time to maximise your investment is crucial.

Making the Choice

There’s no single blanket choice. The decision depends on your risk appetite, your financial abilities, and the objectives of such investment. Every situation demands a separate consideration and due diligence between FD and SIP. Making a wise choice involves understanding your needs and not just investing for the sake of investing.

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