Two friends start investing simultaneously by setting aside Rs 5,000 monthly each. One opts for a secure FD (fixed deposit) while the other chooses a SIP (Systematic Investment Plan) in mutual funds. After five years, they compare their results to see who emerges as the winner.
The comparison is not as straightforward as it appears. According to Siddharth Maurya, Founder and MD of Vibhvangal Anukulakara Pvt Ltd, over a five-year period, a monthly SIP of Rs 5,000 in equity mutual funds can potentially grow to around Rs 3.8–4.2 lakh at returns of 10–12%. In contrast, an FD or RD may reach approximately Rs 3.4–3.6 lakh at returns of 6–7%.
Maurya explains that the reason behind the better returns generated by a monthly SIP in equity mutual funds is due to market-based returns, while FDs offer steady but lower growth. Although the initial difference may not seem significant, even small disparities in returns can accumulate significantly over extended periods.
The key distinction lies in how these two investment options function. FDs provide predictability, ensuring a known outcome at the end, while SIPs are influenced by market movements, potentially experiencing fluctuations along the way.
Sachin Jain, Managing Partner at Scripbox, emphasizes that FDs and SIPs serve different purposes. While fixed deposits offer consistent returns, SIPs are dependent on market performance and might yield lower returns during downturns over a five-year span.
Both SIPs and FDs benefit from compounding, but their growth trajectories differ. FDs grow steadily at a fixed rate, whereas SIPs rely on market performance, which can accelerate growth over time. Maurya highlights that SIPs leverage dynamic compounding and rupee cost averaging, enabling investors to purchase more units when prices are lower, thereby enhancing long-term returns.
Jain simplifies the distinction by noting that at a 6% rate, money may take around 12 years to double, while at 12%, it could double in approximately 6 years. However, he cautions that realizing the full benefits of equity compounding may require more than five years.
Market fluctuations, though unsettling for investors, can be advantageous for SIPs. Downturns provide an opportunity for investors to accumulate more units at reduced prices, potentially boosting returns when markets recover. Jain adds that while volatility benefits long-term investors, returns can be uneven over shorter periods like five years.
Tax implications can subtly impact final returns as well. FD interest incurs annual taxation based on the investor’s income bracket, potentially diminishing post-tax returns. On the other hand, SIPs in equity mutual funds are taxed only upon redemption, as mentioned by Maurya.
Both experts concur that investor behavior often plays a more significant role in determining outcomes than the investment product itself. Actions such as halting SIPs during market declines, chasing past top performers, or blindly renewing low-interest FDs can hinder results. Jain stresses that discipline and consistency are crucial for the long-term success of SIPs.
Choosing between FDs and SIPs depends on individual preferences. If safety and stable returns are the priority, FDs are a suitable choice. Alternatively, for those willing to accept some risk for higher growth potential, SIPs may be more advantageous.
In conclusion, a balanced approach that combines the stability of FDs with the growth potential of SIPs can offer a well-rounded investment strategy. Ultimately, successful investing entails remaining committed, disciplined, and allowing time to play its role in wealth creation.