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Difference Between SIP and Mutual Fund

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The mutual fund industry in India has experienced remarkable growth, with recent data revealing that the Assets Under Management (AUM) has surpassed the monumental 50 lakh crore mark. A significant catalyst driving this expansion is the accessibility provided by Systematic Investment Plans (SIP). SIP allows investors to contribute regularly even with small amounts, towards their financial goals.

If you’re weighing up the pros and cons of sip vs mutual fund, you’ve found your guide! We’ll closely examine the difference between sip and mutual funds by understanding what they are, how they work, their characteristics, and benefits, so you can decide which of the two would be the better fit for your unique financial situation.

Difference Between SIP and Mutual Fund

As you can see, the main difference between SIP and mutual funds is that a mutual fund is an investment option, while SIP is a way to invest in mutual funds and not a separate investment option on its own. 

Here’s a more detailed look into sip vs mutual fund:

Mutual Funds Systematic Investment Plans (SIPs)
Individuals can invest in mutual funds by investing a lump sum amount or through SIP.  With SIP, individuals can invest in a mutual fund by making fixed payments regularly, generally monthly. 
A lump sum investment in mutual funds may be subject to market fluctuations. SIP benefits from rupee cost averaging, which allows investors to reduce the average cost per unit of their investments over time.
Lump sum mutual funds investments do not benefit from rupee cost averaging and are thus riskier than SIPs. Thus, SIPs reduce the risk associated with timing the market.
Mutual funds offer accessibility and ease of investing when taking the SIP route, but lump sum investments require a large upfront capital commitment, which may not be as feasible for some investors. It’s much easier to start investing in an SIP as one can begin with an amount as low as Rs. 500.
Mutual funds are excellent options for achieving financial goals in the short, mid, or long term.  SIPs can also be good for any investment duration, but they shine brightest over the long term.

Understanding Mutual Funds

Let’s begin by understanding mutual funds meaning. Mutual funds are investment vehicles offered by Asset Management Companies (AMCs), that collect or pool money from multiple investors. The money is managed by a fund manager, who invests it in a diversified portfolio of stocks, government bonds, corporate bonds, and other securities. Whenever the investments make a profit, everyone shares in the earnings based on how much money they invested. This offers two huge advantages: 

First, investors gain exposure to a variety of securities across different sectors. This is called diversification, and it helps mitigate investment risk by spreading it across multiple assets. 

For example, if someone buys many shares of the same company on the stock market, and the company performs poorly, the value of their entire investment could go down significantly. Diversification prevents this as every rupee you invest gets spread across a range of assets within the mutual fund’s portfolio.

Second, mutual funds allow investors to benefit from the expertise of professional fund managers who make informed investment decisions on their behalf. Fund managers take an active approach to investing by conducting thorough research and analysis to identify promising investment opportunities and adjust portfolio allocations in response to changing market conditions. 

The allure of mutual funds lies not only in the above two benefits but also in the variety of schemes one can choose from. Investors have access to many different types of mutual funds tailored to suit different financial goals, risk appetites, and time horizons. 

For example, suppose Priya, a 28-year-old salaried employee wants to select a mutual fund scheme for retirement planning. Now because she is young, she can afford to take a higher level of risk in her investment portfolio. This means she can opt for equity mutual funds, which have the potential for very high returns over the long term. 

By investing in equity mutual funds early in her career, Priya can benefit from the power of compounding and ride out market fluctuations over time, and build a massive retirement corpus. If Prabhat wants to invest for some short-term financial goals, he may choose debt mutual funds. These funds offer relatively lower and stable returns with lower risk compared to equity funds but are a good option for capital preservation. 

Similarly, investors with a moderate risk tolerance can opt for balanced or hybrid mutual funds. These funds invest in a mix of equity and debt instruments and offer a more balanced approach to risk and return. So whether the goal is wealth creation, income generation, or capital preservation, there’s a mutual fund scheme suited to meet the specific needs and circumstances of investors.

Also Read: What is The Difference Between Direct and Regular Mutual Funds?

Understanding SIP

Moving on to the definition of sip. A Systematic Investment Plan or SIP allows investors to invest a fixed amount on a regular basis, which can be monthly, quarterly, annually, and so on. While mutual funds are an investment vehicle, SIPs are a method of investing in mutual funds rather than a separate investment option. That means if you’re investing in an SIP, you’re investing in a mutual fund scheme through the SIP route rather than a lump sum. This fact makes investing in mutual funds much more accessible for many investors, as it allows them to bypass the need for large lump-sum investments.

One can start investing with an amount as low as Rs. 500! It’s also a flexible option as you can change the amount you want to invest any time you want. So if you get a job promotion you can increase the SIP amount, or if you are hit with some unexpected expenses, you can pause the investment and manage your financial obligations without straining your budget. 

SIP also instills the habit of disciplined savings and investing. For long-term financial success, getting into this habit is essential. SIP is also convenient as you don’t have to manually intervene to invest either, the amount you want to invest automatically gets deducted from your bank account on the predetermined date! But these aren’t the only benefits of SIP.

One of the biggest advantages of SIP is rupee cost averaging. With this strategy, one can eliminate the need to time the market as investments are made at a predetermined time, regardless of market conditions. With disciplined investing, individuals can buy more mutual fund units when prices are low and fewer units when the prices are high. Over time, this averages out the cost of units and helps investors navigate the market volatility with ease. 

Another advantage SIP offers is the power of compounding interest. Simply put, compound interest is the interest you earn on interest, which can significantly accelerate the growth of your investment over time. 

Overall, SIP stands out as an excellent way to invest in mutual funds, particularly appealing to younger investors who generally do not have significant capital available for lump sum investments.

SIP Vs Mutual Funds – Which is Better?

And so arrives the big question – which is better sip or mutual funds? Since we’ve learned that SIP is a way to invest in mutual funds, we’ll tackle this question by assuming we’re looking at a lump sum investment in mutual funds. The choice between the two options depends on different factors such as:

Financial Goals: 

Financial goals define our investment strategy. The choice between SIP and lump sum investments hence heavily depends on the investor’s financial goals. If the goal is wealth accumulation over the long term, SIPs would be more appropriate. However, if the goal is capital preservation or short-term objectives, a lump sum investment in less risky mutual funds might be more suitable.

Investment Horizon: 

The sheer variety of mutual funds caters to investors with different investment horizons. There are mutual funds that can be appealing to investors with short-, medium-, and long-term horizons. SIPs in equity mutual funds could be better for those with a long-term horizon due to the potential for higher returns over time.

Risk Tolerance: 

SIPs allow investors to reduce risk with rupee cost averaging, which spreads investments over time. This can be better for investors with a lower risk tolerance. On the other hand, lump sum mutual fund investments are more suitable for investors with a higher risk tolerance who are comfortable with market fluctuations.

Individual Financial Situation and Preference: 

Investing in a lump sum amount may not be feasible for all investors, so they can benefit from the affordability and accessibility of SIPs and change the investment amount over time as their financial situation improves. Also, a lump sum investment may come with liquidity concerns, so SIPs offer the flexibility to pause or change contributions as needed without disrupting the overall investment plan.

For example, Amit, a young investor just starting his career does not possess the large capital required for a lump sum mutual fund investment. If he wants to plan for his retirement, SIP in an equity mutual fund would be much better as he has a long-term investment horizon and high-risk tolerance. Thus he can start slowly and achieve his goal of wealth creation in time. 

On the other hand, let’s say Amita is in her late 40s and she didn’t plan for retirement. In her case, the goal would be to preserve the capital and earn modest returns on investment. An investment in debt mutual funds might be much better for her as these funds are safer, which matches her risk tolerance. Her investment horizon is also much shorter than Amit’s, so she would benefit from the stability and lower volatility offered by debt mutual funds.

So which is better sip or mutual funds? Well, as you can see, there is no clear winner in this fight. It all comes down to individual preferences, financial goals, investment horizons, risk tolerances, market conditions, and financial situations.

Also Read: SIP vs FD – Which is Better SIP or FD?

SIPs or Mutual Funds – FAQs

Is a mutual fund the same as SIP?

No, mutual funds and SIPs are different. A mutual fund is an investment vehicle offered by AMCs, that pools money from many investors and is invested in a diversified manner by a professional fund manager. On the other hand, SIP is a way to invest in mutual funds rather than being a different investment vehicle on its own. It allows investors to invest fixed amounts regularly instead of making a lump sum investment. 

For higher profits, which is better mutual funds and SIP?

Both. One can create significant wealth by investing in mutual funds or SIPs, but the choice between the two depends on the investor’s risk tolerance, financial goals, investment horizon, and overall financial situation. A lump sum investment in mutual funds can yield very high profits, but it also comes with significant risks. SIPs are not as risky and help with wealth creation in the long run.

Is SIP better than a mutual fund?

SIP is a way to invest in a mutual fund scheme rather than a separate investment option entirely. The risk associated with mutual funds differs from scheme to scheme, but a lump sum investment may expose investors to market volatility and timing risk. On the other hand, SIPs offer the benefit of rupee cost averaging, which allows investors to spread their investments over time and mitigate the impact of market fluctuations. In the end, the suitability of SIP versus lump sum mutual fund investment depends on your financial goals, risk tolerance, and financial circumstances.