Is SIP better than a Fixed Deposit?

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.

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

Future Value of Single Lump sum Investment Calculator

How to Calculate:

1. If you are in the 'Home' page, please Click on the post title to enter the 'Post Page' and calculate.
2. Please Wait for the game/ excel sheet to load - it may take a minute depending on the speed of your internet connection.
3. Please enter your values of period of investment (in years) and monthly SIP amount by overwriting (typing) the existing contents. We have filled This calculator with indicative numbers as guidance.
4. Please input your answer only in the designated cell (filled with yellow) in the excel sheet. All other cells are protected and are not intended to be altered.
5. To restore the contents of the designated cells please refresh the page.
6. This future value investment calculator for your monthly SIP is currency neutral - that is it can be used for any currency.

Future Value of Investments Calculator

 How to Calculate:

1. If you are in the 'Home' page, please Click on the post title to enter the 'Post Page' and calculate.
2. Please Wait for the game/ excel sheet to load - it may take a minute depending on the speed of your internet connection.
3. Please enter your values of period of investment (in years) and monthly SIP amount by overwriting (typing) the existing contents. We have filled This calculator with indicative numbers as guidance.
4. Please input your answer only in the designated cell (filled with yellow) in the excel sheet. All other cells are protected and are not intended to be altered.
5. To restore the contents of the designated cells please refresh the page.
6. This future value investment calculator for your monthly SIP is currency neutral - that is it can be used for any currency.

Calculator:

I have US$50,000 now. I want to invest in US stocks for 20 years. Which stocks will you recommend? How much would I have at that time?

Friend, I am glad that you are thinking of a 20 year investment horizon. None can suggest you a single stock that you can invest and forget about for 20 years. Of course there are stock of great corporations but at what price are they available in the market? If you buy the stock of an excellent company at a very high price, you as an investor will not benefit. Under the circumstances, You have two options before you, as follows:

1. You may learn ‘Value Investing’, in which case please buy the best book, ‘The Intelligent Investor’ by Benjamin Graham and get started immediately. You may visit my blog atValue Investing.

2. If you do not want to spend a lot of time on investing, you may simply invest your corpus in an ‘Exchange Traded Fund (ETF)’ that mirrors a popular index like DAX, Dow Jones, etcetera or any good mutual fund.

Now the most important aspect of investing begins. You simply forget about the investment till 20 years.

Following table shows what your investment could be if it is able to generate a compounded annual growth rate (CAGR) of 15% per annum or 1.25% per month, which is very much possible.

Future Value of Investment

I have assumed an annual inflation rate of 9.96%, which is probable in India, where I live, but in the US it is very unlikely. So, if the inflation rate is 2% per annum, you will end up with a net future value of US$ 911,208, quite a significant sum.