What is the Difference Between SIP and Mutual fund?

Many people often confuse Mutual Funds with SIPs. Most of them do not understand the difference between SIP and Mutual Fund.  In simple terms, Mutual Fund is where you invest, and SIP is a type of investment in Mutual Funds.

SIP vs Mutual Fund

Before getting into detailed differences between SIP and Mutual Funds, first, let us discuss precisely about SIP and Mutual Funds.

SIP(Systematic Investment Plan)

SIP full form in mutual fund is the Systematic Investment Plan. It is a method through which investors invest small investments in a mutual fund at a given interval. It is mostly about investing money through systematic investment for the long-term. It is neither a product nor an investment option itself.

SIP is just an investment process where you can invest small amounts at regular fixed intervals for building great corpus funds. This is what systematic investment plan meaning is. Also, SIP is considered as a great long-term investment plan.

SIP is also considered as the most effective investment which means, it allows the investors to invest in the future without having to disturb their present lifestyle and expenses. You can choose the investment period on a weekly, fortnightly, or monthly basis according to your convenience.

When you choose a SIP, a chosen amount is auto-debited, at the specified interval, directly from your account. The investment method also includes debt mutual funds, equity mutual funds, and so on, depending on your financial goals and risk horizon.

Mutual Fund

In a mutual fund, money is collected from investors to invest in miscellaneous investments in the capital market. It may contain investments such as shares, debt securities, or the combination of any. Usually, they are a group of instruments or assets managed by fund managers or experts. Here, profit or loss is shared among the investors according to the present market.

In simple terms, mutual funds invest your money further in debt instruments, equities, and hybrid instruments.

Difference between SIP and Mutual Fund

From, investment to returns, there is a lot of difference between SIP and Mutual Fund. Once you go through all the below points, you will get an overall idea about the same.

Investment

Mutual funds are usually considered as one of the best investment options. They are managed professionally by experts who analyze and understand the market trends from time to time and make a decision accordingly. It is cost-effective and happens on a large scale. So, it has minimal risk with possibly higher returns. Most people invest in different types of Mutual Funds mainly because of its investment diversification and of course, for the lower risk level.

investment

But, why should you invest in a SIP? If you are someone who is aiming for long-term financial goals, you should consider choosing a SIP under mutual fund options. It is a disciplined approach that ensures a successful investment. Most importantly, you will stay committed towards the investment as you need to keep paying a fixed amount at specified intervals for a fixed period.

Performance and Return

It is profitable to invest a lump sum in Mutual Funds only if the equity market is rising. You can receive aggressive returns on your investment. Mainly, even if the stock market is facing severe fluctuations, SIP is considered to be a safer option because of its average Rupee Cost and Compounding profits. It is always the best strategy to purchase more number of the chosen funds when the investment market is down and fewer when the market is high.

Flexibility

You will have higher flexibility when you choose SIP as you have a choice of investing even smaller amounts at a chosen interval on a weekly to monthly basis. It is a great option for salaried people or those who are into regular cash flow.

Whereas if you are planning to invest a lump sum amount, Mutual fund is a better choice as risk is lower here. It is more suitable for business people or HNIs (High Networth Investors) who can invest larger amounts at a time.

Cost

By choosing SIP, you will have an averaging cost-benefit. So, the overall purchase cost is lowered when you buy more number of units when the investment market is down and fewer units when the market is up. Overall, it reduces the average purchasing cost.

Volatility

Your investment is spread over a period when you choose SIP, and only a part of the entire investment may face a higher risk than general market volatility.

Benefits of SIP

Now that you have got a basic idea on SIP, let us get into the benefits that it offers.

Easy Investment

The basic advantage of choosing a SIP is you can invest even a small amount in installment, which is easier compared to mutual funds.

Financial Discipline

When you start investing money at a regular interval, for example, monthly, you will instill discipline in your financial planning. You do not have to worry about your long-term goals like your children higher education or something similar.

One-time Decision

You do not have to worry every month which funds to choose and how much to invest in spite of investment market fluctuation. It is a one-time decision that you will stick to a specific period.

How to Choose Best SIP?

You need to have proper planning to achieve your long-term financial goals. Here are some of the factors you need to consider while choosing the right SIP for your investment needs.

Risk Appetite

If you are a risk-averse investor, you can choose debt securities or government bonds. However, if you are someone who does not mind taking an investment risk, then opting for greater allocation of equity is the right choice for you. Here, you risk appetite is defining your investment goal.

Diversification

Fund House

Knowing and understanding the fund house is very crucial. It includes factors like the investment approach, quantity of schemes under offer, past success stories, and so on. It is also advised to know the ease of withdrawing and exiting the fund. Understanding all this will help you choose the right fund house.

Fund Performance

The main objective of your investment is to generate returns. So, the fund house should have a proven record. You can first observe the fund performance for a given span in the past and compare it with any benchmark index such as SENSEX or NIFTY. If you think that the scheme has been performing consistently well, then it is an ideal choice.

fund performance

Expenses

Though exit or entry loads are very small, they may have a greater impact in the long-term. Usually, the bigger the fund size, the lower the expense ratio will be (the fee that is charged annually by the fund house).

Types of SIP

With the benefits that a SIP offers, investors usually flock in the investment market and purchase SIPs as soon as they can. However, you should understand that not one SIP fits all. So, here is the list of some of the functional SIPs available in the market.

types of sip

Top-Up SIP

This is a unique and progressive plan that involves increasing payment installment with each passing month. Mostly, investors who are interested in a successful brand choose this SIP. It has higher annual returns compared to other ones.

Perpetual SIP

Under Perpetual SIPs, you can submit funds periodically in any scheme of your choice up to a chosen month or a specific period during a year. You can either reduce or extend the end date of the SIP according to your choice. As per investor’s reserved right on the end date, you can redeem the amount at any time during the tenor.

Flexible SIP

Flexible SIP is considered as the most comfortable SIP type. It allows you flexibility over the installments. You can decrease or increase the installment as per your financial comfort.

Trigger SIP

Trigger SIP   is complex, which needs you to have a high understanding of the market features. You will have a choice to set an event, index level, NAV or start date.

With the due consideration of different types of investors, there are various SIPs designed. However, trigger SIPs are opted rarely as they are the most complex SIPs. Beginners usually choose flexible SIPs as their first choice to acquire some stability and discipline in their investment journey.

Final Words

Overall, by understanding the difference between SIP and Mutual Fund, you must have got an idea by now that SIP pays you well in the long run. As the investment tenor increases, SIPs offer increased profits. So, you are suggested to practice patience when choosing SIP as your investment method.

The compounding effecting, a SIP feature, offers greater annual returns as the time passes. Profit through SIPs is possible only when you are ready to accept volatility in the market. You should not choose SIP if markets are more likely to be bullish.

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About FinanceGAB

Ajeet Sharma is a financial blogger and I am blogging since 2017. Financegab is a personal blog dedicated to personal finance. The main aim of this blog to help people to make well-informed financial decisions.
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1 thought on “What is the Difference Between SIP and Mutual fund?

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