Actual question:
How is SIP investment better than an 8% interest
rate fixed deposit?
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| 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.
The miracle of compounding working its
magic at an enhanced rate yields unbelievable results.
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
