The Systematic Investment Plan (SIP) has proved to be a better option than the fixed deposit (FD) for several reasons. We examine the trend.
Over the years, as investors have gained access to myriad investment options at the markets, traditional investment options like the fixed deposit (FD) are being re-examined for their viability. You might be presented with two investment schemes: the FD and the Systematic Investment Plan (SIP). It is recommended that you opt for the SIP instead of the FD.
What is an SIP?
A SIP mutual fund is an investment option which allows incremental investments on a monthly basis, in both debt and equity instruments. They are ideal for those who are new to mutual fund investments and who do not wish to park a large amount of money in the fund upfront. Homemakers, students over the age of 18 years, and even millennials looking to finance a variety of future objectives should consider investing in the SIP mutual fund. You can start the SIP for as little as Rs 1,000 and ensure good returns over a period of time.
What is an FD?
A fixed deposit is a sum of money that you set aside in the bank for a certain tenure (measured in months). Over the tenure, the bank pays a certain rate of interest on the sum of money. The returns are gained via the interest earnings. However, if the interest exceeds Rs 10,000 in a year then it is considered as income and charged with TDS. It is a good option for those who have a large amount of money at hand and who wish to grow the size of the fund for future objectives.
The benefits of investing in the Systematic Investment Plan (SIP)
Now that you have an idea of what the SIP mutual fund is and what an FD is, it is time to examine why the SIP is a better investment option:
* The SIP is more affordable. The FD is a viable investment option when the vested sum is large. The higher the size of the deposit, the more it earns via compounding. However, the SIP is a more affordable option because it offers market-linked returns with as little investment as Rs 1,000 per month. Do use a SIP calculator to find out the projected growth of the plan.
* The SIP encourages the savings habit. Though you would like to save money every month, setting aside savings can become difficult in the face of rising expenses. This is where the SIP comes in – the monthly instalment is auto-debited from your account, so you don’t need to do it manually. Money is saved automatically towards the fund on the same date as the previous month.
* Freedom to choose the investment sum. The SIP mutual fund gives you the flexibility to invest as much money as you wish, choosing to increase the investment sum at a later date as well.
* Tax benefit. Staying invested in the SIP for more than a year can get you tax breaks under Sec 80C of the Income Tax Act, 1961.