SIP vs Mutual Fund - Key Difference Between SIP & Mutual Funds

Are you a novice investor who has entered the arena of the financial ecosystem? You must be on a hunt to build your financial portfolio through various investments. There are several investment options available today, including hedge funds, Unit Linked Insurance Plans (ULIP), Systematic Withdrawal Plans (SWP), Equity Linked Saving Schemes (ELSS), and more.

However, it is believed that Mutual Funds and SIPs are the most powerful financial instruments that have gained popularity among many investors. 

In this article, we will discuss what mutual funds and SIPs are, as well as the key differences between them.

What is SIP?

Do you know the full form of SIP? Systematic Investment Plan (SIP), is a method of investing in mutual funds where you contribute a fixed amount of money regularly, like weekly, monthly, or quarterly. This approach helps you build savings over time, taking advantage of market fluctuations. By investing small amounts constantly, you can potentially reduce the impact of market volatility and grow your wealth gradually, making it easier for people to start investing without needing a large sum of money upfront.

When you invest through a SIP, you buy units of a mutual fund regularly. This method helps you earn more units when prices are low and fewer units when prices are high. This approach protects you from market ups and downs and helps you build more units over time, which can significantly boost your wealth.

What is a Mutual Fund?

A mutual fund is an investment option that pools money from many investors to buy a mix of stocks, bonds, and other assets. These funds are created by companies called Asset Management Companies (AMCs) and are managed by skilled professionals known as fund managers, who make investment decisions for the investors.

Mutual funds are popular because they offer several benefits. One of the best features is their flexibility; wherein you can start investing with as little as ₹100 through a SIP, or you can invest a larger amount of money. They also provide liquidity, meaning you can cash out your investment whenever you want. Moreover, mutual funds help spread your risk by investing in different types of assets, which makes your financial portfolio balanced.

SIP vs Mutual Fund

A Systematic Investment Plan (SIP) is an investment technique. With SIP, you can invest a fixed amount of money at regular intervals, like weekly, monthly, or quarterly. The SIP strategy can be used for different types of investments, including mutual funds, public provident funds, fixed deposits, or even buying a small amount of gold each month.

A mutual fund is an investment plan managed by a company called an asset management company (AMC). The AMCs collect money from many investors to buy stocks, bonds, gold, and other assets, aiming to grow your money and help you reach financial goals.

What is SIP in Mutual Funds?

Systematic Investment Plan (SIP), works by allowing investors to contribute a fixed amount of money into a mutual fund at regular intervals, such as monthly or quarterly. When you set up a SIP, you choose the amount you want to invest and the frequency of your investments. Each time you contribute, the money is used to purchase units of the mutual fund, which are then added to your investment portfolio. This process continues automatically until you decide to stop or change the SIP terms, making it a convenient and hassle-free way to invest.

One of the significant advantages of SIPs is that they use a strategy called rupee cost averaging. This means that by investing regularly, you buy more units when prices are low and fewer units when prices are high, which can lower your average cost per unit over time. This method is particularly beneficial for long-term wealth creation, allowing investors to take advantage of the power of compounding as their money grows over the years.

Key Difference Between SIP and Mutual Fund

Let us understand the difference between SIP and a Mutual Fund.

Benefits of Investing in Mutual Funds

Investing in mutual funds offers several advantages. Here are the top five benefits:

1. Diversification: Mutual funds pool money from many investors to invest in a wide range of securities. This diversification reduces risk, as poor performance in one investment can be offset by better performance in others.
2. Professional Expertise: Mutual funds are managed by experienced professionals who conduct thorough research and analysis. This expertise can lead to better investment decisions compared to individual investing.
3. Liquidity: Most mutual funds allow investors to buy or sell their shares on any business day, providing easy access to your money.
4. Affordability: Many mutual funds have relatively low minimum investment requirements, making it easier for individuals to start investing without needing a large amount of capital.
5. Options: There are various mutual funds available, catering to different investment goals, risk tolerances, and strategies, allowing investors to tailor their portfolios to their specific needs.

Benefits of Investing in SIPs

Investing in Systematic Investment Plans (SIPs) offers several advantages. Here are the top five benefits:

1. Disciplined Saving: SIPs encourage regular saving by allowing investors to contribute a fixed amount at regular intervals.
2. Rupee Cost Averaging: SIPs allow investors to buy more units when prices are low and fewer units when prices are high, averaging out the purchase cost. This can reduce the impact of market volatility.
3. Affordability: SIPs typically have low minimum investment requirements, making it accessible for individuals to start investing with smaller amounts rather than needing a large lump sum.
4. Compounding Benefits: Regular investments over time can lead to significant wealth accumulation due to the power of compounding. The returns earned on investments can generate additional returns over time.
5. Flexibility: Investors can choose the amount and frequency of their SIP contributions. Many mutual funds also allow investors to increase or decrease their SIP amounts based on their financial situation.

Factors to Consider Before Choosing between SIP vs Mutual Funds

When deciding between Systematic Investment Plans (SIPs) and mutual funds, it is essential to clarify that SIPs are a method of investing in mutual funds. However, there are several factors to consider when choosing how to invest in mutual funds, particularly through SIPs. Here are some key factors to consider:

1. Investment Goals

Determine your financial goals, whether they are for retirement, education, or a short-term purchase. SIPs are often better for long-term goals.

2. Risk Tolerance

SIPs can help mitigate the impact of market volatility through rupee cost averaging, making them suitable for risk-averse investors.

3. Investment Amount

SIPs allow you to invest small amounts regularly, which can be easier on your budget than a large lump sum investment.

4. Market Conditions

If you believe the market is currently high, a SIP can be a better choice to average out your purchase price over time.

5. Discipline and Consistency

SIPs encourage disciplined investing, making it easier to build a habit of saving and investing over time.

6. Liquidity

Consider how quickly you might need to access your funds. Mutual funds, in general, can have different redemption timelines based on the type of fund.

7. Fund Performance

Look at the historical performance of the mutual funds you are interested in. Past performance does not guarantee future results, but it can provide insight into how the fund has managed market conditions.

Disclaimer: This blog is solely structured for educational purposes only and does not encourage any form of investment. Please consult your financial advisor/fund manager before making any investment decision.