SIP vs Mutual Funds

Out of so many questions shot to us by investors, one of the most asked is that of the difference between SIP and Mutual Funds. If you too, find it difficult to understand the difference between MF and SIP, here is everything that will help you make the right investment choice.

What is a Mutual Fund?

Mutual funds are a pool of money that is gathered from retail investors with an objective of investing to achieve a common objective. On investing in mutual funds, you get the ability to invest in equity, bonds, and money market instruments to earn greater results. Mutual funds help in achieving better wealth generation by investing the money in mutual funds. 

Mutual Funds are managed by the asset management company; it can be a bank or any private investment company you trust. Each investor participates proportionally in the number of units he or she buys. 

  • Mutual Fund is a type of investment instrument where you invest in either a portfolio of a stock or a bond. Sometimes you can also invest in securities or a combination of securities and other instruments.
  • Mutual Funds also hold the ability to give investors an opportunity to invest in diverse investment instruments that are professionally managed at a low price point.  
  • Mutual Funds are categorized based on the kind of securities you are investing in; an investor can invest in MF as per their investment objectives and type of returns.  
  • Mutual Funds charge annual fees and other charges in return for assets management of the fund on behalf of investors. This fess is called expense ratios.

SIP Investment in Mutual Funds

SIP is simply a way to invest in a mutual fund. When you are investing your money in Mutual Funds and paying up for it in a single go, you are making a lump sum investment; you are making a single transaction to purchase all units at once. 

But in the case of SIP, the same investment amount gets divided all across in 12 months, and you own the flexibility to purchase the same units by starting the investment as low as Rs. 100 every month.  

The above-mentioned scenario clearly confirms that SIP is not a product or investment option or instrument directly. It is a process by which you can contribute to mutual funds as a small but regular amount to invest in a mutual fund and increase your wealth over a period of time. 

SIP is usually considered as a good method of investment if you are planning a long-term investment goal. 

SIP Vs. Mutual Funds

- Investment Mode: By investing in SIP, you make a regular investment to purchase units of mutual funds. By regularly investing can help you create a good sum of money. 

- Flexibility: With SIP, you have higher flexibility of investment, as you can start investing a small amount on a regular basis, either weekly/fortnightly/monthly. It makes SIP the best option of investment for salaried people or person. Mutual Funds can be done only if you have money in surplus. It is usually better for people who are into business or have a higher net worth that can afford a large amount in a single go. 

- Lower Cost: By investing in SIP, you get the benefit from cost averaging; you can lower the overall cost of purchasing by buying more units when the market is down or lesser units if the market is up. While in Mutual Funds, you end up buying all the units at a price, which can be higher or lower at a single time. 

- Volatility:  For first-time investors, the market can be confusing to understand. You just don’t know the right time to enter the market. If you invest in a lump-sum manner that way you will always have a question of time. Thus, SIP gives you protection from making a wrong decision as you get to purchase over time, and only some parts of it during the entire investment will face higher than usual market volatility.