What Is The Difference Between SIP And Mutual Funds?
Investing in funds is a vital part of financial planning, and mutual funds along with Systematic Investment Plans (SIPs) are widely chosen as investment options. While both aim to grow your wealth, they vary in their structures and investment approaches.
In this article, we will explore the significant distinctions between SIP and mutual funds, assisting you in making an informed choice about the most suitable destination for your hard-earned money.
What Is the Difference Between SIP and Mutual Funds?
A mutual fund, managed by financial experts, pools funds from multiple investors and allocates them to a diverse range of assets, including bonds, stocks, and other securities. A professional fund manager takes charge of making investment decisions on behalf of the investors.
On the other hand, a SIP is an investment method within mutual funds. It enables you to invest a fixed amount at regular intervals (monthly, quarterly, etc.), offering an alternative to making a lump sum investment. Essentially, a SIP facilitates investment in mutual funds without being a distinct investment product in itself.
SIP Vs. Mutual Fund
Now, let's take a closer look at the primary differences between mutual funds and SIPs:
Structure
Mutual Fund
A mutual fund is an investment scheme that pools money from various investors and allocates it into different assets based on the fund's objectives. It can be either equity-oriented or debt-oriented, catering to different risk profiles.
SIP
A SIP is an investment approach for mutual funds, enabling you to invest a fixed amount at regular intervals. This method fosters disciplined investing and leverages rupee-cost averaging to minimise the impact of market fluctuations.
Investment Mode
Mutual Fund
In a mutual fund, you have the option to invest either through a lump sum or a systematic investment plan (SIP).
SIP:
SIP is a specific method of investing and can only be used to invest in mutual funds.
Investment Frequency
Mutual Fund
A lump sum investment involves putting in a substantial amount in a single transaction. This approach is more suitable for investors who possess a substantial corpus and intend to deploy it all at once.
SIP
SIP involves investing a fixed amount at regular intervals (monthly, quarterly, etc.). This approach is suitable for investors who want to start with a smaller amount and continue investing regularly over an extended period.
Market Timing
Mutual Fund
When you invest a lump sum amount in a mutual fund, the returns are dependent on the market conditions at the time of investment.
SIP
SIP mitigates the impact of market volatility. Since you invest at regular intervals, you buy more units when the market is low and fewer units when it is high. This strategy helps average out the purchase cost and reduce the overall risk.
Compounding Effect
Mutual Fund
The compounding effect comes into play with both mutual funds and SIPs. As your investment grows, the returns generated are reinvested, leading to increased earnings over time.
SIP
SIPs encourage regular investing, allowing the power of compounding to work effectively, even with smaller amounts invested.
SIP In Mutual Funds – How They Work?
Now that we have understood the difference between SIP and mutual funds, let's explore how SIPs work within mutual funds:
SIP Registration
To start a SIP, you need to choose a mutual fund scheme that aligns with your financial goals and risk tolerance. You can then register for SIP either through the fund house's website or by visiting their office.
Frequency And Amount
When registering for a SIP, you must decide the frequency (monthly, quarterly, etc.) and the amount you want to invest regularly. The amount will be automatically debited from your bank account on the specified dates.
NAV And Units
The invested SIP amount is utilised to buy units of the selected mutual fund scheme based on the Net Asset Value (NAV) prevailing on the investment date. The NAV signifies the per-unit value of the fund.
Rupee-Cost Averaging
Since you invest a fixed amount at regular intervals, you automatically buy more units when the NAV is low and fewer units when the NAV is high. This way, the average cost of acquiring units gets reduced over time, leading to better returns.
Flexibility And Convenience
SIPs offer investors flexibility in terms of investment duration. You can choose to continue the SIP for a specific period or until you reach your financial goal. Additionally, it is easy to modify or pause the SIP if required, giving you control over your investment journey.
Mutual Fund Benefits
Mutual funds offer several advantages, making them a popular investment option in India:
Professional Management
Mutual funds are managed by experienced and skilled fund managers who make investment decisions based on in-depth research and analysis. Their expertise helps in optimising returns and managing risks effectively.
Diversification
Investing in a mutual fund allows you to diversify your portfolio across various assets, sectors, and companies. This diversification minimises the impact of any one investment's poor performance on your overall portfolio.
Liquidity
Mutual funds offer high liquidity, meaning you can easily buy or sell your units at the prevailing NAV. This liquidity provides you with the flexibility to access your funds when needed.
Suitable For All Investors
Mutual funds cater to investors with different risk profiles. They offer equity funds for higher risk tolerance, debt funds for lower risk tolerance, and balanced funds for a mix of both.
SIP As An Avenue For Investing In Mutual Funds
One of the significant advantages of mutual funds is the option to invest through SIPs. For investors with limited funds or those who wish to build their investments gradually, SIPs provide a systematic approach to wealth creation.
SIP Benefits
SIPs offer distinct advantages that make them an attractive investment method:
Disciplined Investing
SIPs foster a disciplined approach by allowing you to invest a fixed amount at regular intervals. This practice aids in maintaining commitment towards your financial objectives and minimises the urge to time the market.
Affordable Investment
SIPs allow you to start investing with a small amount, making it accessible to investors with limited funds. It is a cost-effective way to build wealth over time.
Averaging Out Market Volatility
By investing regularly, you buy more units when the market is down and fewer units when the market is up. This strategy averages out the cost of investment and shields you from the impact of market volatility.
Long-Term Wealth Creatio
Since SIPs encourage regular and disciplined investing, they are particularly suitable for long-term wealth creation. The power of compounding works wonders when investments are held over an extended period, leading to substantial returns.
Flexibility And Convenience
SIPs offer investors the flexibility to customise their investment journey. You can choose the SIP amount, frequency, and the mutual fund scheme that aligns with your financial goals.
Conclusion
SIPs and mutual funds are two different aspects of the same investment journey. While mutual funds are investment schemes that pool money from multiple investors to invest in various assets, SIP is a method of investing in mutual funds. The main difference lies in their structure, mode of investment, and frequency. Both mutual funds and SIPs have their benefits, and the choice between them depends on your financial goals, risk appetite, and investment horizon
Remember, before making any investment decisions, it's essential to understand your financial goals, risk tolerance, and consult with a financial advisor if needed. A well-informed decision today can pave the way for a financially secure tomorrow.
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FAQ
Can I stop or modify my SIP?
Yes, you can stop or modify your SIP at any time. Most fund houses allow investors to pause, increase, or decrease the SIP amount as per their convenience.
Is it better to invest through SIP or a lump sum?
Both have their merits. SIPs suit investors with a disciplined approach and limited funds, while lump sum investments may be preferred by those with a substantial corpus and clear investment goals.
What returns can I expect from mutual funds?
Mutual fund returns are subject to market performance. Historically, equity funds have provided higher returns over the long term, while debt funds offer more stable but comparatively lower returns.
Is SIP and mutual funds the same thing?
No, they are not the same. A mutual fund is an investment scheme that pools money from multiple investors to invest in various assets. SIP, on the other hand, is a method of investing in mutual funds by contributing a fixed amount at regular intervals.
Are SIPs risk-free?
No, while SIPs offer rupee-cost averaging and mitigate market volatility, they are not risk-free. The value of investments can fluctuate based on market conditions, affecting returns.
Do Asset Allocation Funds require active management?
Some Asset Allocation Funds follow passive management, while others may involve active management to adjust the asset mix based on market conditions. The level of management depends on the specific fund's strategy.