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.
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.
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.
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?"
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:
| Aspect | SIP | Lump sum investment |
| Investment approach | Systematic investment approach with a fixed amount at regular intervals. | One-time investment with a comparatively larger sum. |
| Initial capital | Investments can be started with low amounts. | Requires a larger capital to initiate investment. |
| Risk management | Reduces risk over time through rupee cost averaging. | More prone to risk due to complete exposure of the sum to market conditions. |
| Return on investment | Provides stable returns under favourable market conditions. | Provides higher returns under favourable market conditions. |
| Market knowledge | Suitable for beginners with less knowledge about financial markets. | Better suitable for veterans with more knowledge and experience in the financial markets. |
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.
| Investing month | Deposit amount | NAV | Units allotted | Total units |
| January | Rs. 1000 | Rs. 100 | 10.00 | 10.00 |
| February | Rs. 1000 | Rs. 80 | 12.50 | 22.50 |
| March | Rs. 1000 | Rs. 100 | 10.00 | 32.50 |
| April | Rs. 1000 | Rs. 150 | 06.66 | 39.16 |
| May | Rs. 1000 | Rs. 200 | 05.00 | 44.16 |
| June | Rs. 1000 | Rs. 400 | 02.50 | 46.66 |
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.
SIPs are designed for long-term investment. They offer the flexibility to start with small amounts and increase them over time as your financial situation improves. They also inculcate a habit of regular saving and investing, which is essential for financial discipline. SIPs can be easily automated, making the investment process hassle-free and ensuring that you stay committed to your financial plan. 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.
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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Mutual funds and SIPs are not mutually exclusive. An SIP, or Systematic Investment Plan, is a method of investing in mutual funds. SIPs help average out market volatility, potentially leading to higher long-term profits compared to lump sum investments in mutual funds.
For long-term investment, SIPs in mutual funds are highly preferred. They offer the benefits of compounding, risk averaging, and disciplined investing. Over time, this method can help build substantial wealth while mitigating market volatility.
No, a mutual fund pools money from multiple investors to invest in securities, while SIP, or Systematic Investment Plan, is a structured approach to investing. Through SIP, one can invest in mutual funds through regular, fixed investments over time.
To choose the best SIP, consider factors like your financial goals, risk tolerance, investment horizon, fund performance, and current market conditions. Seek advice from a financial advisor or utilise online tools to compare SIP options and select one that aligns with your objectives.
Certainly, you can withdraw your SIP investments, partly or fully, at any time. But it's important to check for any exit load or penalties, especially if you withdraw within a certain period from the date of investment. Long-term investing typically yields better results due to compounding effects.
In times of market downturns, the value of your SIP investments may decrease. However, SIPs allow you to buy more units at lower prices, which can benefit you when the market recovers. Staying invested through market cycles can help achieve long-term growth and financial goals.
Investing Rs. 5,000 per month in an SIP for 20 years can potentially grow significantly due to the power of compounding. If assuming an average annual return of 12%, you could accumulate around Rs. 50 lakhs over 20 years. However, actual returns may vary based on market conditions.
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16 September 2024
8 mins read
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