The Differences Between Mutual Funds, SIPs, and Fixed Deposits
Investment can be described as the act of allocating funds to investment plans. Investments are generally taken with the intention of extra income. The said extra income is useful for taking care of day-to-day expenditures once you retire, i.e., the time when you completely quit the job market. When you leave the job market, you bid goodbye to the monthly income you enjoy while working. So before retiring, you need to check your finances thoroughly.
Investment can be classified into two types. One type of investment involves bank deposits. The other kind of investment involves investments in the market. Under bank deposits, you are required to open an account in the bank. You need to sign up for the type of account that meets your need. One example of different reports available in Indian banks is fixed deposits. Market investments, on the other hand, invest in the market.
A major reason people prefer to opt for market investments is that they are known for coming with the capacity to fetch higher returns. But it is important to remember that these investments come with many risks. Mutual funds are prominent examples of investment schemes that can help you with market investments.
But before learning about the differences between mutual fund schemes, SIPs, and fixed deposits, i.e., FDs, you need to know what they are.
One of the most popular investment options, mutual funds, can be defined as an investment vehicle formed whenever an AMC, i.e., asset management company, pools money from a group of several investors known for having common investment objectives. The professional referred to as the fund manager is responsible for managing the pooled investment mutual fund portfolio. The fund manager uses the invested money to buy securities such as stocks and bonds. These purchases are made after ensuring they align with the investment mandate. Mutual fund schemes are considered an ideal investment option for those seeking a portfolio that an expert manages.
Moreover, you can diversify your portfolio by investing in mutual funds. That’s because the fund allocation would cover several different asset classes. As an investor, fund units will be allocated to you depending on your investment. In these schemes, investors will enjoy either losses or profits that are proportional to the sum they invest. The fund manager has one intention. The said intention is to fetch higher returns to investors. The performance of mutual funds is linked to the performance of the underlying assets.
Systematic investment plans, or SIPs, are not investment schemes. Instead, these plans are a mode of investment. A mode of investment can be defined as the method by which you can invest in mutual fund schemes. There are two modes of investment. One mode is referred to as lump-sum mode. Under that mode, you need to make a one-time payment. The other mode is referred to as SIP.
SIPs, on the other hand, work differently than lump-sum mode. Through SIPs, you can pay for your mutual fund investments in installments. On a specific date of every month, a certain sum is deducted from your account. Thanks to the standing instruction feature, the sum is removed automatically.
Fixed deposits (FD):
Fixed deposit accounts are a variant of accounts offered by banks. In this account, you are required to deposit a lump sum amount. In return for the deposit, you will get a fixed interest rate throughout the investment’s tenure. The FD’s interest rate is higher than that of a regular savings account. After the end of the term, you can withdraw your investment. Also, after a lot of time, you have a choice of extending the period.
How are they different from each other?
|Mode of investment||Funds are invested in both installments, and lump-sum||Funds are allocated in installments||Money is deposited in lump-sum|
|Liquidity||Liquidity in these schemes is dependent on the type of mutual fund scheme||A SIP is not an investment scheme, so liquidity is not a factor||This type of bank account is very liquid|
|Risks||They are very risky||Not applicable||They are not very risky|
|Returns||Returns are not assured in these schemes||NA||Returns are guaranteed in these schemes, but the sum is dependent on the interest rate.|