What is The Difference Between SIP and Mutual Funds?

A beginner’s journey through investment can often be riddled with doubt and confusion. A multitude of theories and advice come your way through friends, family, and of course, the internet.

If you are new in the investing arena, chances are that you have heard of terms like stocks, mutual funds and SIPs (Systematic Investment Plan). With experts claiming that mutual funds and SIPs are one of the best vehicles for generating consistent returns, novice investors often end up pondering over the question: mutual funds or SIP, which is better?

Are you one of those new investors wanting to understand the difference between SIP and mutual funds? Read on to find out.

What are Mutual Funds?

A mutual fund can be described as an investment scheme where the fund house accumulates a pool of money from various investors and invests it in various financial instruments to generate returns.

Say, you want to invest in the banking sector. Now, doing your own research and buying every top-performing stock in the sector is not feasible. Instead, you invest in a mutual fund crafted for the banking sector. This mutual fund will combine securities belonging to the banking sector, in different proportions to ensure good returns.

These schemes are managed by professional fund managers, who study the technical and fundamentals of each security in detail. Mutual funds invest in a range of financial instruments like stocks, bonds, and commodities.

What is an SIP?

SIP, short for Systematic Investment Plan, is an investment scheme wherein you invest a certain sum at regular intervals of time. Since they require investors to invest regularly, the investment benefits from the power of compounding over time. Additionally, investors need not worry about market fluctuations significantly affecting their corpus since the SIP is held for the long term.

In a nutshell, a systematic investment plan is a way to invest in a mutual fund scheme – through small but regular contributions. 

In recent times, SIPs have gained massive popularity in the Indian market, since they offer a disciplined manner of building wealth over the long term. Investors can start an SIP with as little as INR 100 per month. To maximize your return, it is important to start investing early and to keep investing regularly.

SIP vs Mutual Funds

There is a considerable difference between mutual funds and SIP. While mutual funds are an investment product, SIP is one of the techniques to invest in the product. Let us understand the difference between mutual funds and SIP with an example.

Imagine you are on an e-commerce website, and you decide to buy an LED TV. While checking out, you can pay for the TV in multiple ways. You can pay the full amount upfront or you can opt for EMI payments. Choosing either option will not affect the picture quality of the TV, however, various offers can change the final price for different methods of payment.

This is exactly the case with mutual funds and SIP. A mutual fund is the LED TV, and SIP is the mode of payment. When opting for a particular mutual fund, you have the option to either invest at once with a lump sum amount or a particular sum at regular intervals.

SIP is a way to invest in mutual funds; it is not a separate investment model, which answers the question, "Mutual funds or SIP, which is better?"

Investing in Mutual Funds: Lump sum or SIP?

Choosing between a lump sum or an SIP is a more valid question, as both are methods of investment. The decision to choose between either comes down to your financial goals, risk appetite, and investment horizon.

To have a clearer picture as to which method is better for you, take a look at this comparison table:

SIP: Benefits and Risks

While both the methods of investing, lump sum and SIP, are capable of generating handsome returns, for someone starting out in their investing journey, the benefits of SIP far exceed those of lump sum investing.

Risk management is the backbone of every investment. It is important to plan for returns, but managing your risks is even more crucial; SIP offers that edge to new investors. Consistent periodic investments stabilise the overall fluctuations of the underlying asset over the long term.

For instance, you invest Rs. 1000 every month, starting January, in a particular mutual fund with Rs. 100 as its current NAV.

At the end of the first half of the year, your total investment would be Rs. 6000 and you would have been allotted a total of 46.66 units. Your average NAV per unit comes up to Rs. 128.59. Thus, even with a fluctuating market, with regular investments, you can fight volatility and expect steady growth.

SIPs are designed for long-term investment. The benefits of averaging hardly show in the beginning but with consistent and disciplined investments, the magic of compounding starts to show in a few years.

Even though SIPs offer multiple advantages, it is important to realise that these returns are subjected to market risks. Even though a fund shows stellar past performance, there is no guarantee that it will perform the same in future as well. Hence, it is highly recommended that you carry out your own analysis with proper risk-reward calculation, or consult with your financial advisor.

Parting Thoughts Regarding SIP vs Mutual Funds

The difference between SIP and mutual funds boils down to this – SIPs offer a way to invest in mutual funds. Instead of thinking about SIP and mutual funds as two separate forces, consider them as partners who work best in tandem.

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