SIP vs Mutual Fund: What Are the Key Differences?

Before you invest, it’s only fair to ask: Where is your money going, and what can you expect in return? To answer that you first need to understand the tools available to you. Two common yet often confused options are mutual funds and SIPs and the first step to smart investing is knowing the difference between a mutual fund and an SIP. A mutual fund is a regulated investment that gathers money from many investors to purchase a diversified mix of stocks, bonds, or other securities. It is managed by expert fund managers on your behalf. 

In contrast, a Systematic Investment Plan (SIP) is an approach to investing in a mutual fund scheme. It functions similarly to a recurring deposit where you choose a fixed amount, as little as Rs. 100, and it takes money out of your account on a predetermined date over a period, such as a month, to invest in the mutual fund. In this article, you will learn the key differences between SIPs vs. mutual funds.

What is a Mutual Fund?

A mutual fund is an investment product where asset management companies collect money from multiple investors and invest it in a mix of securities like stocks and bonds. Professional fund managers handle most mutual funds to maximise returns while minimising risk. However, not all mutual funds are actively managed. Some, like index funds, simply track a market index and aim to replicate its performance at a lower cost.

What is the Function of a Mutual Fund?

Here’s how a mutual fund operates to manage and grow investors’ money:

• Collecting Money: When you subscribe to a mutual fund, it is buying units, thus contributing to the money put into the fund.
• Investment Strategy: The fund manager acquires money from investors and allocates it across a diverse mix of assets based on the fund’s investment objectives.
• Net Asset Value (NAV): The NAV of every unit of the mutual fund varies in a positive or negative way based on how the underlying securities perform.

Example

Let us assume there are 100 investors who each invest ₹10,000 in a mutual fund, resulting in a pool of ₹10 lakh. The fund manager will invest this amount in different stocks and bonds. As a result, suppose the total value of these investments rises to ₹12 lakh, leading to an increase in the NAV. Therefore, every investor benefits.

Benefits of Mutual Funds

Investing in mutual funds has its perks. Let’s break them down into simpler points to help you relate better:

• Managed by an Expert: When investing in a mutual fund, your money is managed by an expert fund manager. These professionals devote their entire time to studying the markets and analysing companies to make informed decisions. However, not all mutual funds are actively managed. Some, like passive or index funds, aim to mirror the performance of a specific market index, offering a low-cost investment option.

• Balanced and Diversified: Every mutual fund invests in various companies in different industries. In case one stock underperforms, the rest can help balance out the losses. This reduces risk and maximises your chances of building wealth.

• Easily Redeemable: Most mutual funds allow you to redeem your investment at any time. As long as you don’t choose a specific lock-in plan like ELSS for tax saving, you don’t have to worry about your money being locked in for years.

• SEBI Regulated and Transparent: In India, the Securities and Exchange Board of India (SEBI) regulates mutual funds. This means there are policies in place to ensure your money stays safe. You also receive timely updates and essential documents that keep you informed about the current status of your investment.

What is SIP in Mutual Fund?

An SIP (systematic investment plan) allows an investor to periodically invest in mutual funds in a disciplined manner. With SIP, you don’t need to invest a lump sum amount. You can start with a really small amount like ₹500 or ₹1,000 every month or even lower (or week/quarter). These amounts will be debited from your bank account as per schedule and will be used for investing in a mutual fund of your choice.

Example

Assuming you have an SIP of ₹1,000 per month in an Equity Mutual Fund starting on the 5th of every month, the fund will allocate units to you based on the NAV applicable on that day, amounting to ₹1,000 worth of units. This approach lets you spread out your investment costs, helping you handle market ups and downs more smoothly. That’s the idea behind rupee cost averaging.

Advantages of SIP

• Easy Entry: You can start with as little as ₹100 to open a SIP account. It’s a good option for new investors who want to start with a small investment and grow gradually.

• Regular Savings: The disciplined SIP approach encourages you to set aside a small amount each month on a date you choose for your investment. This gives you a routine way to save with no extra effort needed.

• No Need to Predict Market Trends: Because you invest regularly, the market’s fluctuations would not be of concern to you. This approach averages the cost of investment over time.

• Power of Compounding: When you invest steadily over a long period, your returns will start to yield additional returns. The compounding effect ultimately results in the growth of money over time.

• Simple and Highly Flexible: You can alter or suspend your SIP anytime as per your needs. There are no restrictions and you have full control over your funds.

Key Differences Between SIP and Lumpsum Mutual Funds

Let’s now check out the basic differences between a Lump-Sum Mutual Fund and SIP:

Conclusion

Understanding the difference between a mutual fund and an SIP is really important if you’re just beginning your investment journey. Think of a mutual fund as the actual investment product, while an SIP is just one of the many ways you can go about investing in it. If you’ve got a lump sum that you’re ready to invest in and the market is looking good, a one-time investment might be a smart move. On the other hand, if you prefer to grow your wealth gradually over time without the stress of market fluctuations, an SIP provides a convenient and disciplined way to do just that. Happy investing!

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