Actual question:
How is SIP investment better than an 8% interest
rate fixed deposit?
 |
| Picture shows happy frog wondering whether a SIP or Fixed Deposit is an attractive investment |
Answer:
Dear Friend!
Thank you for raising a serious and thought provoking question.
Before we address your core question, let us get a few
fundamentals cleared. All SIP investments are not better than an 8% fixed
deposit. For SIP is not class of investment or a certain product. SIP simply
means a regular and disciplined investment habit. Therefore, a SIP in a debt
mutual fund is definitely as poor an investment as an 8% fixed deposit when
growth is concerned. In order for the performance be better than a fixed
deposit, the SIP shall be in a 100% equity growth fund.
Now let us address you fundamental question. The relative
superior performance happens because of two important reasons as follows:
History proves that
stocks yield a better rate of return in the long term. The minimum average
returns yielded by the S&P BSE Sensex is 15% - which is almost double the
fixed deposit rate in question.
Let us go to the resource future value of investment calculator. An
investment of 100,000 for 40 years in a product that yields 15% per annum
compounds in to 38,134,227 at a maximum inflation of 5% per annum. Whereas a 8%
fixed deposit will yield 1,691,497 only! A more than 25 times poor result!
The conclusion is quite obvious is not it?
Thank you,
With Best Regards
Anand
