The Real Cost: FD vs SIP After Tax
FD interest is taxed at your income slab rate, while equity SIP enjoys favorable LTCG tax:
- FD at 30% slab: 7% - 2.1% tax = 4.9% effective return
- FD at 20% slab: 7% - 1.4% tax = 5.6% effective return
- SIP (equity): LTCG 10% only on gains above ₹1 lakh/year
After tax, FD barely beats inflation (6-7%). SIP has a clear advantage for wealth creation.
The Smart Strategy: Use Both
You don't have to choose one. Here's a balanced approach:
- Emergency Fund (6-12 months expenses): Keep in FD or liquid fund
- Short-term goals (1-3 years): FD or debt mutual funds
- Medium-term goals (3-7 years): Hybrid funds or balanced SIP
- Long-term goals (7+ years): Equity SIP for maximum growth
Frequently Asked Questions
Is SIP riskier than FD?
Yes, SIP in equity funds has short-term volatility - your value can drop 20-30% during market crashes. However, over 10+ years, equity has historically recovered and grown significantly. FD has zero risk but guaranteed lower returns.
Can SIP give negative returns?
Yes, in the short term (1-3 years), equity SIP can show negative returns during bear markets. However, no 10-year SIP in diversified equity has given negative returns historically in India.
Should I move my FD to SIP?
Not entirely. Keep 6-12 months expenses in FD/liquid fund as emergency reserve. For long-term goals, gradually shift to SIP. Don't move all at once - start SIP with new savings.
Is RD better than SIP?
RD (Recurring Deposit) is similar to FD with monthly deposits. It gives 6-7% guaranteed returns vs SIP's 10-15%. For long-term, SIP wins. For short-term guaranteed savings, RD is fine.