SIP Vs Mutual Funds

Find out the difference between SIP and Mutual Funds

Key Takeaways

In Mutual Funds, fund managers pool together funds from various investors to invest in different securities.
You can choose between lumpsum and SIP mutual fund investments.
Lumpsum is when you invest a significant amount in a mutual fund scheme.
SIP allows you to invest smaller sums in instalments at regular intervals.
You can choose between Lumpsum and SIP mutual funds based on your risk appetite, financial goals and investment horizons.

Introduction

Mutual Fund investments are lucrative investments that help your savings yield higher returns. They continue to remain the most popular investment instrument among conservative, moderate, and aggressive investors. Most new investors tend to confuse SIP vs Mutual Funds. But are they different? Let us find out in this article.

What are Mutual Funds?

A Mutual Fund is a type of investment where an Asset Management Company pools funds from various investors to invest in several securities, including stocks, money market instruments, bonds, etc. Through its fund managers, the fund house allocates assets to earn profitable gains for investors based on their risk profiles, investment goals, and preferred investment tenures. Investors collectively share both gains and losses in proportion to their investment in the fund. So how are SIP and Mutual Funds Different? Here is a comparison

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SIP vs Mutual Funds – Meaning

A Systematic Investment Plan (SIP) is a method of investing in Mutual Funds. With SIPs, you can invest a fixed amount in a fixed mutual fund scheme at regular intervals. What Recurring Deposits are to Fixed Deposits is what SIP is to Mutual Funds.

A Lumpsum Investment is the traditional method of investing in Mutual Funds, where you invest a large amount of money, in a single scheme, in one shot. Lumpsum investments are ideal for people with surplus cash and can afford to invest a considerable sum at once. Here, the fund managers allocate large quantities of units at the prevailing Net Asset Value (NAV).

Difference Between SIP and Mutual Funds

Mode Of Investment

When you invest in a Mutual Fund SIP, the AMC deducts a fixed amount from your mandated bank account/savings account on a fixed date. You can choose the investment interval, which can be weekly, monthly, quarterly or half-yearly. With lump-sum investments, you can invest any sum of money, any time, after assessing market conditions.

Risk Factor

SIP enables you to limit any losses by investing in the stock market with small amounts. In comparison, profitable lumpsum investments have a higher risk quotient since you may gain profits or book losses on larger sums.

Rupee-Cost Averaging

In SIPs, in a bear market, you end up buying more units of the mutual fund scheme since the per-unit price of the share reduces. However, during a bullish trend, when the NAV of the fund is high, you are allotted lesser units. As for mutual funds, you buy all units at the prevailing NAV, with no room for rupee-cost averaging.

Power of Compounding

You can see the compounding effect generating higher returns when you hold a SIP for longer durations and reinvest your profits. The power of Compounding does not exist in the case of lumpsum Mutual Fund investments.

Conclusion

Both SIPs and Mutual Funds are excellent, professionally managed investments and come with their own unique characteristics. You should choose your preferred investment method based on your affordability, risk profiles, and investment goals.

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*Disclaimer: This article is for information only. We recommend you get in touch with your income tax advisor or CA for expert advice.