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What Is the Difference Between SIP and Mutual Fund?

13 January 2022
5 minutes

Investors are always on the hunt to find better forms of investment. There are various options in the market, from hedge funds to Systematic Withdrawal Plan (SWP), Unit Linked Insurance Plan (ULIP), Equity Linked Saving Scheme (ELSS), and many others. But, the most prominent are Mutual Funds, where more than 81 lakh investor accounts were added in 2020, and the Systematic Investment Plan (SIP), where almost 91.8 billion net flow of SIP was registered in March 2021, as per RBI data.

Investors are mostly eager to increase their returns without the hassle of tracking their portfolios and trading in the market. Thus, many forms of investment now hire fund managers to trade on behalf of the investor, which saves the investor’s time. Moreover, the fund manager’s professional knowledge will be beneficial in maximizing the profit in the investment.

Both mutual funds and SIP invest in the share market, but there are a few differences between them. In this article, we discuss what mutual funds and SIP mean and the key differences between them. 

Mutual Funds:

A mutual fund is a form of investment in which an authorized fund house, such as banks and asset management companies, collects money from investors and trades in securities on their behalf, intending to maximize the profit ratio with the lowest risk. The risk of market movement is reduced because the money is invested in different assets for different investment horizons. When the risk is reduced, a loss in one asset is offset by a profit in another asset in the portfolio.

The investment is done in shares, bonds, and commodities and is known as a portfolio for an individual investor. This portfolio is managed by a finance manager, also known as a fund manager. Mutual funds are one of the safest forms of investment, where the investment is made in a lump sum form. Various mutual funds aim to achieve certain objectives, such as small-cap, mid-cap, and large-cap funds, index funds, etc.

SIP 

SIP is similar to a mutual fund, but the investment is mostly made in lump sum form in mutual funds. Whereas, in SIP, a small amount is constantly invested in the fund on a recurring basis. With SIP, you can invest a minimum of Rs 500 every month or quarter. A fund manager is allocated to invest on behalf of investors in the market in various sectors such as shares, bonds, and commodities. The aim of the fund manager is to maximize the profit while keeping the risk factor at a minimum. 

One of the major benefits of investing in SIP is the power of compounding, where the interest earned on the principal value is reinvested. Over a period, investors yield a higher return of profit.

The key differences between Mutual funds and SIP are as follows:

Investment value: The investment in mutual funds is done in lumpsum form while the investment in SIP is done in smaller recurring amounts on a monthly or quarterly basis.

Investment form: The investment is made in debt instruments, debt mutual funds, equity mutual funds, and hybrid instruments, which is a mix of both equity and debt funds.

The volatility of the market: The market is constantly changing in a bearish trend and bullish trend. These ever-changing market trends have a larger impact on mutual funds than on SIP as the investment value of mutual funds is higher than that of SIP. 

Charges: The AMC (Annual Maintenance Charge) and the other charges, like transaction cost, is higher in mutual funds than in SIP as the investment value of a mutual fund is larger. In mutual funds, the charges incurred by way of fund manager’s fees and the transaction value is on the higher side, while in SIP, the investment value and the trade value are always on the lower side. 

Redemption: Both SIP and mutual funds are highly liquidated forms of investment. The only difference is the redemption charges are on the higher side in mutual funds than in SIP.

A Mutual Fund is an investment vehicle allowing you to gain exposure to stocks, bonds, or other financial instruments. While an SIP is a tool to invest in a Mutual Fund. Comparing Mutual Funds and SIPs is like comparing apples and oranges – they are two completely different concepts. A mutual fund is an investment avenue while a SIP is a method of investing in a mutual fund.

Key Takeaways 

  • Mutual funds and SIP are subjected to market risk.
  • Mutual funds are a lumpsum form of investment, while SIP is a recurring form of investment.
  • The amount of investment in mutual funds is on the higher side, while the investment in SIP is on the lower side.
  • Mutual funds and SIP have taxation benefits under Section 80C of the Income Tax Act, where the investor can claim up to Rs 1,50,000 exemption.

FAQs

  • Which is a better form of investment for an investor with a lower regular income?

Investment in SIP is recommended for an investor who can regularly invest in smaller amounts of investment.

  • For higher profits, which is better between mutual funds and SIP?

Mutual funds are more beneficial than SIP for higher returns and profits, where the return is gradual over a long period. 

  • Which is more of a diversified portfolio?

Both have a diversified portfolio where the funds are allocated to securities, bonds, and commodities.

  • For the long term, which is the most preferred form of investment?

For the long term, SIP is a more preferred form of investment due to compounding interest.

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