Apples are delicious, and so are oranges, but they aren’t the same! Similarly, SIP and mutual funds are different.
For someone who always thought that SIP and mutual funds were two interchangeable terms, understanding the difference can be perplexing. But today, we want to clear the air surrounding the difference between SIP and mutual funds.
So, for all the investors out there eager to increase their returns without any hassle, here we go!
Key Takeaways
- Mutual funds are popular among investors as an investment tool, and SIP is a disciplined way to invest in mutual funds.
- Mutual funds are relatively easier to buy and sell.
- Investing in mutual funds is beneficial for retirement planning, children’s education and marriage and tax savings.
- You can invest in mutual funds through an asset management company.
- Mutual funds can be purchased through a lumpsum payment or through a systematic investment plan.
Are SIP and Mutual Funds the Same?
Umm, no! SIP and mutual funds are different. But think before you label these as two mutually exclusive products. What you need to know is that a systematic investment plan (SIP) is nothing but a regular investment in mutual funds.
Mutual funds are a popular and reliable form of investment in which a bank or an asset management company collects money from investors and trades in securities. This way, investors get proportionate ownership by purchasing units.
What else? Mutual funds are highly liquid, and you can sell them online or offline.
Now, let’s talk SIPs. Short for systematic investment plan, SIP is simply a method of investing in mutual funds. It allows you to invest systematically – weekly, monthly, quarterly.
All in all, mutual funds are a form of investment, while SIP is a systematic way to invest in mutual funds.
Wait. We’ll make it easy for you. Mithlesh wants to grow his savings by investing in mutual funds. Sadly, he does not have a lot of funds available. Someone suggested him to invest in mutual funds through a systematic investment plan, where he needs to pay a certain sum of money at regular intervals.
Since he didn’t have to pay a huge amount at once, he was able to invest. Mithlesh also got a chance to enter the market during different market cycles.
Now that you know the difference between mutual funds and SIP, let’s dive deeper into the details.
Why is Everyone Around You Investing in These Funds?
Before you say it, we know you know that people of all ages are investing in mutual funds. But why?
This is because mutual funds are relatively simple, unlike other investment options. Once you’ve found mutual funds with a good record, you only have a small role to play. Also, mutual funds are easier to buy and sell compared to other investment options.
But here comes the biggest reason why people choose to invest in mutual funds. If you invest all the funds in a single company and that company fails, you lose all your money. But, if a firm within mutual funds fails, the loss is constrained.
Now that you know what is the difference between SIP and mutual funds, let’s find out why people prefer investing in mutual funds through SIP.
The main reason to choose SIP is disciplined saving. When you choose to invest through SIP, you commit to saving regularly. You can also discontinue the SIP plan at any moment. Plus, you don’t need a large sum of money when investing through SIP. Fortunately, salaried employees can now invest in mutual funds without having to pay a large amount at once!
How are Investment Goals Related to Mutual Funds?
If you are in your early 20s, investment might be the last thing on your mind. And if you have crossed a certain age, you may think it’s too late to invest. The truth? Investment is beneficial at any age.
Consider these goals that investing in mutual funds help you achieve.
Retirement Planning
Retirement planning is a long-term goal, and various types of diversified mutual funds, such as large-cap funds, multi-cap funds, and mid-cap funds, are suitable. This will help make the golden years of your life so much better!
Systematic investment plan is the best investment mode for long tenures. The good news is that you can benefit from the power of compounding.
Children’s Education and Marriage
Besides retirement, what are your other long-term goals? Maybe your children’s education and marriage. In such cases, index mutual funds, large-cap funds, hybrid funds, gold funds, etc., are suitable.
Tax-Savings
Certain types of mutual funds, such as ELSS, make you eligible for tax deduction under section 80C of income tax. ELSS allows you to claim a tax deduction of up to 1.5 lakhs.
Mutual Funds vs SIP: Which One is For You?
Investors are on a constant lookout for better forms of investment. And why not? Investing is not just saving your money but also getting good returns on it.
We have already discussed the difference between SIP and mutual funds. But how do you know which one’s the best for you? Read on to find out more details about mutual funds vs SIP!
Investment Value – You make investments in lump sum in mutual funds, while the investment through SIP is in recurring amounts – monthly or quarterly.
Investment Form – In a SIP, you invest in a systematic and disciplined way at regular intervals, which is a better way to achieve financial goals.
Flexibility – SIP gives you higher flexibility. It allows you to invest small amounts at regular intervals, which is great for salaried people!
Volatility – New investors often don’t know the best time to enter the market. If you opt to invest all your money at once, there is a risk of timing the purchase and being exposed to considerable volatility.
With systematic investment plan, your purchase is spread over time, and only some parts of the investment will experience high market volatility.
All in all, both lumpsum investment and SIP allow you to grow your savings with mutual funds.
If you have a small but regular flow of money, SIP is a more suitable option. And if you have a large amount of money and risk tolerance, lumpsum investment is better.
Did You Know?
As of January 31, 2022, the Indian Mutual Fund Industry has 38,01,210 crores in Assets Under Management (AUM)!
Source: https://www.amfiindia.com/indian-mutual
Pros and Cons of Choosing Mutual Funds
| Pros | Cons |
| Mutual funds are liquid, and you can redeem the units whenever you want | Mutual funds do not promise fixed returns |
| They allow making a diverse investment, which reduces the risk | Since fund managers manage mutual funds, investors have no control over their investment |
| You get expert management that helps incur a profit | While diversification saves you from major losses, it also stops from making a high profit |
| There is a scheme for every financial goal, and you can start from as low as INR 500 | There are fees and expenditures associated with professional mutual fund management |
| ELSS mutual funds help save tax under section 80C of income tax | Lock-in period can be a major disadvantage if you need funds urgently |
Pros and Cons of Choosing SIP
| Pros | Cons |
| When investing through SIP, you do not need to worry about payments or timing the market | SIP is not a great option for people who are unsure of their cash inflows |
| Investors only need to pay a small amount for a fixed period | The amount to be paid every month is fixed and cannot be modified under any circumstances |
| Investing through SIPs is a hassle-free process as the amount automatically gets deducted from the assigned bank account | The date and period of SIP cannot be changed |
How to Invest in Mutual Funds?
Investing in mutual funds is easy, and you can do it through an asset management company. Complete your KYC at a KYC registration agency online by filling in the KYC registration form and uploading the self-attested documents such as PAN card, passport, driving license and voter’s ID. And complete an in-person verification by SEBI approved agencies.
Alternatively, you can invest in mutual funds through a fund distributor. In this case, the mutual fund house pays a commission to the mutual fund distributor.
We have already discussed the difference between mutual funds and SIP, along with the pros and cons of both. Now, it’s up to you to decide whether you want to invest in mutual funds by making a lumpsum payment or through SIP.
Best Mutual Funds to Invest in 2022
| Mutual Fund | Expense Ratio | 3 Year Performance |
| Mirae Asset Tax Saver | 0.43% | 26.9% |
| Quant Active Fund | 0.58% | 34.44% |
| Mirae Asset Emerging Bluechip Fund | 0.68% | 27.93% |
| Canara Robeco Emerging Equities Fund | 0.63% | 25.31% |
| Axis Midcap Fund | 0.46% | 28.65% |
| Invesco India Contra Fund | 0.55% | 21.62% |
| Parag Parikh Flexi Cap Fund | 0.82% | 30.77% |
| IIFL Focused Equity Fund | 0.90% | 31.61% |
Source: https://www.forbes.com/advisor/in/investing/best-equity-mutual-funds/
Word to Remember
ELSS Mutual Funds – Short for Equity Linked Savings Scheme, ELSS is a mutual fund investment scheme that helps save income tax. ELSS mutual funds are also known as tax-saving funds.
Take Charge of Your Financial Future
If you’re looking to easily realize your life’s goals, mutual funds are a great option, and you should invest in them after thorough research. We hope that now the difference between SIP and mutual funds is as clear as the difference between apples and oranges!
FAQs
The difference between SIP and mutual funds is quite simple to understand. First things first, these are not two different investment tools. Mutual funds are a form of investment, and SIP is a method of investing in mutual funds by paying a fixed amount at regular intervals.
Mutual funds are safer when compared to stocks because of diversification. Diversification is a key tactic for investors who want to reduce the risk. But remember, reducing the risk may limit the returns.
You can begin moving out a fixed amount from your fund to a stable debt fund about 9-12 months before the due date when you require money.
First-time mutual fund investors can consider initiating a systematic investment plan. It is ideal for those with a regular income source, such as salaried employees.
Yes, SIP is a safe method to invest your money into mutual funds. With SIP, you don’t need to worry about timing the market. In the end, you’ll be paying an average of a high and low price as the price will be high in some months and low in others.
