Difference Between SIP and Mutual Fund

Investors are constantly seeking out better investment options. The two of the most popular options are Mutual Funds and the Systematic Investment Plan (SIP). In fact, as of July 2024, data from the India Infoline reveals that there were 9.73 crore SIP accounts, and the total SIP contribution for the month was ₹23,332 crore​.

These figures reflect the strong confidence of Indian retail investors in mutual funds, particularly through the SIP investment route.

Most investors want to increase their returns without the hassle of constantly tracking their portfolios or actively trading in the stock market. To simplify this, professional fund managers are often appointed to manage investments on behalf of the investors. This not only saves time but also leverages the expertise of these managers to maximize returns.

While both Mutual Funds and SIP involve investing in the stock market, there are some crucial distinctions between them. This article will provide a detailed understanding of these two investment options and how they differ from each other.

Mutual Funds

A Mutual Fund is a type of investment where a fund house, such as an asset management company or a bank, pools money from various investors and invests it in securities such as stocks, bonds, and commodities. The main objective is to maximize returns while managing risk.

The risk associated with market fluctuations is mitigated by diversifying investments across various assets. This diversification means that losses in one asset class may be balanced out by gains in another, providing a more stable return. The collection of assets in which an investor’s money is placed is referred to as their portfolio, which is managed by a professional known as a fund manager. Read our blog Benefits of Investing in Mutual Funds to know more.

SIP (Systematic Investment Plan)

SIP is a method of investing in Mutual Funds, but unlike a one-time lump sum investment, SIP allows investors to invest smaller amounts on a regular basis-monthly or quarterly. You can start a SIP with as little as ₹500 per month.

Similar to Mutual Funds, a professional fund manager handles the investments, with the aim of generating returns while managing risk. One of the key advantages of SIP is the power of compounding, where the earnings from your investments are reinvested, leading to higher returns over time.  Tap to explore SIP Investing: Building Wealth, One Step at a Time here.

Mutual Funds vs SIP-Key Differences

For new investors, the question often arises: What is the difference between SIP and Mutual Funds? Let’s explore the main differences:

• Investment Amount: Mutual Funds typically involve a lump sum investment Lump Sum vs SIP: Which one is better?, whereas SIP allows you to invest smaller amounts on a recurring basis, such as monthly or quarterly.

• Investment Medium: Both SIP and Mutual Funds can invest in a variety of instruments, including equity, debt, and hybrid options that blend the two.

• Market Volatility: Market trends-bullish or bearish-affect Mutual Funds and SIP differently. The impact of market fluctuations is generally more significant for lump sum Mutual Fund investments, as the amount invested is larger compared to the periodic investments made through SIP. Read our blog Why SIP Stands Out as the Effective Investment Method to further understand in details.

• Liquidity and Redemption: Both Mutual Funds and SIP offer high liquidity, meaning you can withdraw your investment relatively easily.

Conclusion: Understanding the Difference

Mutual Funds and SIP serve different purposes. Mutual Funds are an investment avenue where you invest in a diversified portfolio of stocks, bonds, or other assets. SIP, on the other hand, is simply a method of investing in a Mutual Fund over time. In other words, comparing the two is like comparing the overall investment vehicle (Mutual Funds) with the method of how you choose to invest in it (SIP).

Key Takeaways: SIP vs Mutual Funds

• Both Mutual Funds and SIP are subject to market risks. • Mutual Funds involve a lump sum investment, while SIP allows for recurring, smaller contributions. • The investment amount in Mutual Funds is generally higher, while SIP caters to those who prefer lower, regular investments.

By understanding these differences, investors can make informed decisions on which investment method suits their financial objectives and risk tolerance.