SIP vs Term Deposit: Selecting the Ideal Investment Option

Investing hard-earned money wisely is quite crucial for long-term financial goals and growth. Among various way of investment available, predominant are term deposit and SIP (systematic investment).

What is a Term Deposit?

Term deposits are the type of investment offered by financial institutions. To open term deposit, an investor needs to deposit a lump sum amount of money for a fixed amount of duration, like a year or more, at a predetermined fixed interest rate.

What is SIP?

An SIP (Systematic Investment Plan) is a strategic approach to invest in financial vehicles like mutual funds. You must be wondering how to invest in sip? Well, here, an investor needs to invest a predetermined amount of money at regular intervals like quarterly or monthly or daily. 

SIP spreads out the market risk by offering rupee cost averaging and lets investors accumulate wealth over a period. There are various types of SIP Investment, which are suitable for investors with long-term investment goals and sufficient risk appetite, offering diversification and flexibility across several mutual fund schemes. 

What is the Difference between Term Deposit and SIP?

There are certain differences between Term deposit vs mutual fund SIP, which are discussed below. 

1. Investment Amount

SIP requires a predetermined instalment amount at regular intervals, while Term Deposit requires investors to invest lump sum amounts at once.

2. Risk and Returns

Term deposit is a low-risk driven investment opportunity that offers fixed returns but at lower fixed interest rates, while SIPs are subject to market risk but do have the potential to offer significant returns over time. In this blog, you can read about- How are SIP returns Calculated

3. Liquidity

Term Deposit has a fixed lock-in period decided by investors, and any premature withdrawal can lead to penalties, whereas SIP offers liquidity for most of the fund schemes and allows investors to redeem mutual fund units whenever needed. 

4. Tax Implications

Interest rates earned on Term deposits are subject to taxes depending upon the investor’s income tax slab. However, SIP has certain tax benefits like LTCG (Long-term Gain Capital) tax exemption on equity mutual funds held for more than a year.  To know more on it read here- SIP Tax Benefit

5. Tenure

Unlike Term Deposits, which have predetermined lock-in periods, SIP can be continued indefinitely, allowing investors to accumulate wealth for a longer period. 

SIP Vs Term Deposit: Which is Better?

Telling which one is better highly depends on the investors’ financial goals and risk tolerance, along with the overall investment horizon. If an investor is looking for stable and secure returns, then Term Deposit can be a better option than SIP. However, if an investor is willing to take risks by investing in market linked products and for potentially higher returns with a disciplined investment approach, then SIP is more suitable. Here are few SIP Investment Tips

Conclusion

In conclusion, both SIP and Term Deposit have their pros and cons and depends on individual preferences and objective. One should ensure that their investment strategy aligns with their long-term financial objectives. 

Frequently Asked Questions

1. Does SIP guarantee a return?

No, SIP cannot guarantee potentially higher returns. However, it is subject to market risks. However, SIP spreads out market risk through rupee cost averaging and is a disciplined investment approach. 

2. Which is Safer, SIP or Term Deposits?

Investment in mutual funds are subject to market risks whereas term deposit may enjoy deposit insurance guarantee in case taken from Banks.

 

Disclaimers

SIP  investments does not guarantee of any profit/loss in an upward/declining market. Kotak Mahindra Asset Management Company Limited/Kotak Mutual Fund is not guaranteeing or promising any returns/future performances.

Investors may consult their Financial Advisors and/or Tax advisors before making any investment decision.

MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY