Investment is an important component of financial planning. There are several investment choices that one can go for, including mutual funds and SIPs which are among the most popular. Although both work towards wealth generation, they vary widely in structure and approach to investment.
This blog post will discuss the key differences between SIP vs mutual fund helping you to better understand them as a guide to your investment journey.
What are Mutual Funds
Mutual funds pool money from many investors who buy stocks, bonds, and other funds. Mostly it is left to the professional managers who act on behalf of those investors by using their expertise so they can increase profits while minimising any possible risk.
What is SIP?
Systematic Investment Plan (SIP), is a method of investing through mutual funds where one invests a fixed amount at regular intervals such as monthly or quarterly. This sort of investment takes advantage of disciplined investing using rupee-cost averaging to reduce the impact made by market ups and downs.
SIP vs Mutual Fund: Key Differences
Structure
Mutual Fund: This is a kind of investment plan that combines funds from different investors and uses them in purchasing various assets as per the objectives of the fund. It can be either equity-based or debt-based, depending on the types of risks involved.
SIP: SIP stands for systematic investment plan which is investing in mutual funds with a fixed amount at regular intervals. These help to cultivate disciplined investing and apply rupee averaging thereby reducing market volatility.
Mode of Investment
Mutual Fund: There are two ways to invest in mutual funds online; lump-sum or systematic investment plans (SIP).
SIP: SIP is an exclusive method for investment money that can only be used for putting money into mutual funds.
Market Timing
Mutual Fund: The performance of a lump sum invested in a mutual fund depends on how the market behaves.
SIP: SIP helps against seasonal market instability. One only acquires more units when prices are low and fewer units when prices are high by making periodical investments.
Compounding Effect
Mutual Fund: The compounding effect comes into play with both mutual funds and SIPs. When the investment appreciates, the returns generated are reinvested thereby resulting in increasing yields over time.
SIP: SIPs allow regular investments to take place, thus enabling even small amounts to compound effectively.
How does SIP work in Mutual Funds?
- SIP Registration
To begin with, the SIP, select a mutual fund plan that matches your financial goals and risk appetite. Then you can follow their website on how to register for SIP or go to their head office.
- Frequency and Amount
While registering for the SIP, you have to choose its frequency monthly/quarterly, etc) and the amount that needs to be invested regularly. This will be debited automatically from your bank account on those dates.
- NAV and Units
The Net Asset Value (NAV) determined on the day of investment purchase determines the number of units bought using the invested amount of SIP. Such units represent NAV per unit.
- Rupee-Cost Averaging
This automatically occurs when you invest a fixed amount at regular intervals. Consequently, over time the average cost of acquiring units gets reduced leading to better returns.
Benefits of Mutual Fund
Professional Management
Mutual funds are professionally managed by seasoned fund managers who base their investment decisions on exhaustive research and analysis. This expertise optimizes returns and effectively manages risks.
Diversification
With mutual funds, one can diversify his or her portfolio across different assets, sectors, and companies. By doing this it becomes easy for every poor performance in any one investment to have limited effects on your entire portfolio.
Liquidity
Liquidity in mutual funds is high because you can easily sell or purchase your units. Therefore, this liquidity eases accessibility to one’s resources.
Suitable for Every Investor
There are mutual funds that are suitable for all different types of investors with varying risk profiles such as:
- Equity funds are meant for those with a higher risk tolerance appetite
- Debt funds are ideal for individuals with lower levels of risk tolerance
- Balanced funds that meet both types of investors at once.
Benefits of SIP
- Disciplined Investment
Through SIP investment, one can make pre-determined and regular investments. Commitment to financial goals is enhanced while the temptation to time the market is reduced.
- Affordable Investing
Even with little money, you can still start investing through SIPs. It is a good way of accumulating wealth in the long run at low costs.
- Long-Term Creation of Wealth
SIPs have stronger suitability for individuals who want to create wealth over longer time frames because they tend to encourage consistent investing behavior. There is an increase in the returns on any investment that has been held for a long period due to the power of compound interest.
- Flexibility and Convenience
Investors get options to personalize their investment journey via SIP. Depending on your financial goals, you can determine the amount, frequency, and mutual fund scheme.
Conclusion
Understanding the difference between SIP and mutual fund can help you make informed investment decisions and build a robust financial portfolio. While some prefer lump sum investments others may choose to invest systematically through SIPs but both methods have unique benefits enabling one’s financial growth.
Disclaimer: Mutual Fund investments are subject to market risks, read all scheme related documents carefully.