Key Differences between SIP & Mutual Fund And Which Is Better

When it comes to investment, terms like “Mutual Funds” and “SIP” often get confusing for beginners. The former is interlinked with the latter but different. A mutual fund is an investment instrument, while an SIP or Systematic Investment Plan is a method of investing in mutual funds. Knowing the difference can help you choose the right approach based on your financial goals.

This article provides an overview of mutual funds and SIPs, compares their differences, and explains the dynamics of SIPs and mutual funds in detail.

Overview of Mutual Funds

A mutual fund is an investment vehicle that pools money gathered from different investors to create a diverse portfolio of stocks, bonds, or other securities. With the assistance of professional fund managers, mutual funds target specific financial objectives, such as growth, income, or a balance between growth and income.

Key Features

• Offers diversification to minimize risk.
• It is run by experts.
• Available to both small and large investors.

What is MF SIP?

A Systematic Investment Plan (SIP) is an investment approach for mutual funds. Using SIPs, investors can invest a fixed amount of money periodically into their selected mutual fund, monthly, quarterly, or yearly.

Key Features

• It promotes disciplined investing.
• Facilitates small, regular investments.
• The rupee cost averaging minimizes the impact of market volatility.

The Differences Between Mutual Funds and SIP

While mutual funds and SIPs are closely related, their nature and purpose differ. Here’s a comparison:

Aspect	Mutual Funds	SIP
Definition	A financial product pooling money to invest in a portfolio of assets.	A mode of investing in mutual funds through regular contributions.
Investment Method	It can be a lump sum or through SIPs.	Exclusively a systematic, periodic investment method.
Flexibility	Lump-sum investments offer flexibility for one-time contributions.	Requires commitment to fixed periodic investments.
Risk Management	Lump-sum investments may expose the investor to higher risk during volatile markets.	Spreads investments over time, reducing market timing risk.
Discipline	It relies on the investor’s ability to invest and time in the market.	Encourages disciplined, consistent investing.
Rupee Cost Averaging	Not applicable for a lump sum.	Automatically averages purchase cost over time.
Ideal For	Investors with substantial funds are ready to invest.	Individuals prefer gradual, systematic investment.

SIP in Mutual Funds – How They Work?

A SIP is an easy and disciplined way to invest small amounts periodically in your chosen mutual fund scheme. Here’s how it works:

Choose a Mutual Fund Scheme:

Select a mutual fund based on your financial goals, risk appetite, and investment horizon.

Decide the SIP Amount and Frequency:

Decide the amount you want to invest periodically, say, ₹500, ₹1,000, or more, and the frequency, whether it is monthly or quarterly.

Auto-Debit Facility:

SIP investments are automated through an auto-debit facility linked to your bank account.

Rupee Cost Averaging:

SIPs invest at different NAVs over time, averaging the purchase cost and reducing the impact of market volatility.

Compounding:

With SIPs, small regular investments grow over time through the power of compounding, significantly enhancing long-term wealth creation.

Flexibility to Stop or Modify:

Most SIPs offer the flexibility to stop or modify your contributions without penalties.

Conclusion

While mutual funds and SIPs are interlinked, their roles in your investment journey are different. Mutual funds are the investment vehicle, whereas SIPs are a disciplined way to invest in mutual funds. The choice between a lump sum and SIP depends on your financial situation, goals, and risk tolerance.

SIPs are especially useful for small investors, which has the added benefit of rupee cost averaging and disciplined investment. Lump sum investments in mutual funds may be suitable for investors who have a higher risk appetite and are able to time the market well. However, it is advised to choose the right form of mutual fund investment based on individual goals and preferences.

FAQs

Disclaimer:

This information is for general knowledge and guidance only. Tax laws are complex and subject to change. Always consult with a qualified tax professional for personalized advice. Investments in mutual funds are subject to market risks. Please read all scheme-related documents carefully before investing.