What Is the Difference Between SIP and Mutual Funds – 2022 Guide
The world of investments witnessed one of its most significant turnarounds with the introduction of mutual funds. The risk-averse public found a method to taste the equity markets alongside considerable risk management. The new product also led to the introduction of new investment mechanisms – SIP – Systematic Investment Plan. SIP and mutual funds, for the longest time, have had a difference and definition battle. Are they the same? What differentiates the two? Which is better? Let’s find out.
Table of Contents
What is a mutual fund?
Mutual funds are investment products that pool money from various investors and invest in equity, debt, and other assets, or in a combination of the securities, with an aim to generate capital gains for the investors. Professional fund advisors manage these funds, researching every aspect, risk and return potential of the security/investment scheme.
Different mutual funds have different fund objectives which the fund manager tries to achieve through careful selection of composition of the fund and timely rebalancing activities. This translates to different types of funds having different risk-reward potential. The mutual fund industry is constantly evolving to encompass all types of risk profiles and new schemes are launched to cater to the varied investor base.
Mutual funds are mainly classified based on their underlying asset mix as equity funds, debt funds or hybrid funds. This also dictates their investment style and taxation.
The main advantage of mutual funds is the diversification one gets and the fact that the entire market or market segments can be captured through a single investment.
What is SIP?
SIP stands for Systematic Investment Plan. It is a mechanism/methodology to invest in the markets, mainly in mutual funds. It should be noted that it is not a product on its own, but rather only an investment mode.
In a SIP, a predetermined amount is auto-debited from the investor’s account on a pre-fixed date and invested in a chosen mutual fund. This not only helps bring about discipline in investing but also helps with risk management as the investor is not exposing their entire corpus to market fluctuations all at the same time. That said, SIPs also work to average out the cost of investment, called rupee cost averaging, and assist in tide over short-term market volatility.
Most mutual funds allow investors to invest through the SIP route. Some people may not have a lump sum to invest. For such individuals, SIP may be a good option. With as minimal as Rs. 500 (depending on the fund and scheme), one can start a SIP.
Difference between SIP and mutual funds
Now that we have observed in detail what a SIP and mutual funds stand for, let us look at the difference between the two.
Flexibility
SIPs are a relatively flexible investment mechanism. As mentioned above, SIP allows small, regular investments, which can either be made weekly or monthly, even overnight.
It can be a convenient investment vehicle for the salaried class, i.e., individuals who have steady cash flow. If you choose to invest in mutual funds through the lump sum route, bulk/surplus amount shall be required impacting capital flexibility.
Volatility
Markets are always turning. If you have invested in mutual funds through a lump sum method, there are chances that you are exposing your entire capital to more risk than you desire. There is also a possibility that the investor gets unnerved and pulls out the money, losing out on future potential gains.
But through SIP, the investment is done overtime periods, risking only a portion of the capital of the investor at a time. Given SIPs are automated, it offers better resilience of investor emotions against volatility and forces the investor to put in the money irrespective of the tide in the market.
Cost
In lump sum investment in a mutual fund, there is a possibility that the NAV is high on the day you decide to purchase your mutual fund units.
Through SIP, you may ride the lows and highs of the markets by purchasing a small quantity at a time. When the market is on an upswing and the NAV is high, you may get lesser units, and when the market is down and the NAV is impacted, you will get more units of the mutual fund. This is a win-win!
Investing discipline
SIP offers a disciplined route to investment with time periods spread closely and evenly. As one may start a SIP with the smallest of denominations, it can inculcate discipline and introduce the power of compounding early on for even the most novice of investors.
FAQs
What is the minimum amount required to start SIP?
Mutual funds generally specify the minimum amount required to invest in them. By and large, through a nominal amount like Rs. 500, one can start a SIP.
Are mutual funds and SIP different?
Yes. Mutual funds are an investment avenue. SIP is an investment mode that allows investments in mutual funds in smaller portions.
Can I invest large amounts in mutual funds?
Yes, through the lump sum method, you may invest a large corpus. There is generally no upper limit to investing in mutual funds.
Can I stop a SIP?
Yes. You can stop SIP anytime you wish. Once you submit the required information/documentation, your broker could close your account.
Conclusion
In the investing world, the wheels of innovation are constantly churning. With the introduction of mutual funds and its other convenient mechanism – SIP, the markets positively invite rational investors to invest and take back returns from other than traditional routes. Mutual funds pool resources from various investors to invest them in various equity and debt instruments. It is to be noted that SIP is a mechanism/ investment scheme that allows one to invest in mutual funds and is not a product on its own. Consult your financial planner before investing in mutual funds.
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