When it comes to long-term investing, fixed deposits (FDs) and Systematic Investment Plans (SIPs) are two popular options. While an FD offers relatively predictable returns, a SIP can provide higher growth potential by investing regularly in market-linked mutual funds.
But what happens when a Rs 10,00,000 FD is compared with a Rs 10,000 monthly SIP over 15 years? The amount invested and the way returns are generated are quite different in both cases.
Here is a look at how much the two investments could potentially grow over 15 years based on assumed rates of return.
Rs 10,00,000 FD for 15 years
Suppose Rs 10,00,000 is invested in a fixed deposit for 15 years at an assumed interest rate of 6.5% per annum.
Assuming quarterly compounding, the FD could grow to approximately Rs 26,30,471 at the end of 15 years.
This means the estimated interest earned would be around Rs 16,30,471, taking the total maturity amount to about Rs 26.30 lakh.
The actual FD maturity value can vary depending on the bank’s interest rate, compounding frequency and applicable FD terms.
FDs are generally preferred by investors looking for relatively predictable returns and lower exposure to market fluctuations.
Rs 10,000 monthly SIP for 15 years
Now consider investing Rs 10,000 every month through a SIP for 15 years.
Over 180 months, the total amount invested would be:
Rs 10,000 × 180 = Rs 18,00,000
If the SIP earns an assumed annualised return of 12%, the investment could grow to approximately Rs 49,95,802 after 15 years.
The estimated gains would be around Rs 31,95,802, over and above the Rs 18 lakh invested.
Unlike an FD, however, SIP returns are not fixed or guaranteed. A SIP generally invests in mutual funds, and the final corpus depends on market performance.
FD vs SIP: Estimated corpus after 15 years
The two investments produce significantly different estimated outcomes under the assumptions used.
The Rs 10,00,000 FD could grow to around Rs 26.30 lakh after 15 years at an assumed 6.5% annual interest rate.
Meanwhile, a Rs 10,000 monthly SIP could potentially build a corpus of approximately Rs 49.96 lakh if it earns an assumed 12% annual return.
That puts the estimated SIP corpus around Rs 23.65 lakh higher than the FD maturity value.
However, there is an important difference between the two investments. The FD requires Rs 10 lakh upfront, while the SIP involves a total investment of Rs 18 lakh spread over 15 years.
Why can the SIP create a higher corpus?
The main reason is the difference in the assumed rate of return.
In this example, the FD earns 6.5% per annum, while the SIP calculation assumes a 12% annualised return. Over a long investment period, even a difference of a few percentage points in annual returns can have a substantial impact because of compounding.
The SIP also allows investors to invest smaller amounts regularly rather than committing the entire amount at the beginning.
However, the higher potential corpus comes with higher risk. Market-linked investments can fluctuate, and the SIP may earn less than or more than the assumed 12% return.
FD or SIP: Which can create a higher corpus in 15 years?
Based on the assumptions in this comparison, the Rs 10,000 monthly SIP can create a higher corpus after 15 years.
The estimated SIP corpus is around Rs 49.96 lakh, compared with approximately Rs 26.30 lakh for the Rs 10,00,000 FD.
But the comparison should not be viewed as a guaranteed outcome. The SIP calculation assumes a 12% annualised return, while the FD calculation assumes a 6.5% annual interest rate.
FD or SIP: What should investors consider before investing?
An FD may suit investors who prioritise relatively stable and predictable returns and want to avoid direct exposure to market volatility.
A SIP may appeal to investors with a longer investment horizon who are comfortable with market fluctuations and are looking for potentially higher long-term growth.
Investors should consider their financial goals, risk tolerance, investment horizon and liquidity requirements before choosing between an FD and a SIP.
Disclaimer: The FD interest rate of 6.5% and SIP return assumption of 12% are used only for illustration. Actual FD maturity values and mutual fund returns may differ. Mutual fund investments are subject to market risks, and past performance does not guarantee future returns.