FD at 7.5% vs inflation at 7.5%: Expert says inflation cancels FD gains, SIPs deliver growth

When it comes to investing hard-earned money, most individuals lean toward fixed deposits (FDs) due to their perceived safety and guaranteed returns. But in a high-inflation economy and rising interest rate environment, Systematic Investment Plans (SIPs) in mutual funds are fast emerging as the smarter alternative for those seeking to build real wealth.

“FDs may feel secure, but when you adjust for inflation and taxes, they often yield little or even negative real returns,” said CA Nitin Kaushik, a chartered accountant and investment advisor. “The safety they promise can quietly erode your purchasing power.”

Let’s begin with a key factor—investment amount. Both FDs and SIPs are easy to start, but SIPs have the edge when it comes to flexibility. With SIPs, you can begin investing with as little as Rs 500 a month, making them accessible to even young investors or those just starting out. “The compounding effect in SIPs is extremely powerful over the long term,” Kaushik said. “Even small amounts can grow significantly if invested regularly in well-performing funds.”

Interest rates are another critical point of comparison. Traditional FDs may offer a fixed 7–7.5% return, but these gains are capped. SIPs, on the other hand, invest in market-linked instruments. This means there's no guaranteed return, but historically, equity mutual funds have delivered average returns of 10–12% over longer periods. “It’s true that SIPs come with market risk,” Kaushik explained. “But they also offer higher potential upside, unlike FD,s which remain stagnant regardless of market growth.”

FD vs SIP: A Comparative Snapshot

When it comes to taxation, FDs fall short again. The interest earned on FDs is fully taxable as per your income slab, significantly reducing your post-tax returns—especially for those in the 20% or 30% tax brackets. While tax-saving FDs under Section 80C do allow deductions up to Rs 1.5 lakh, the lock-in period is five years. In comparison, SIPs in equity mutual funds are taxed at just 10% on long-term capital gains above Rs 1 lakh, provided the units are held for more than a year. This makes SIPs more tax-efficient, especially for long-term investors.

That said, risk appetite plays a major role in choosing between the two. “FDs are undoubtedly the safest option when you're looking for capital protection and assured returns,” Kaushik acknowledged. “But SIPs offer a balance of growth and tax advantage—provided you’re willing to stay invested for the long term and ride out market volatility.”

Bottom line: Fixed deposits may protect your money, but SIPs have the potential to grow it. For investors seeking wealth creation, inflation-beating returns, and better tax treatment, SIPs are a strategic choice—so long as risks are understood and managed.