Mutual Fund vs SIP : The difference between mutual fund and SIP
People get confused between mutual fund and SIP but mutual fund is a type of investment and SIP is way to invest money. SIP is an option available for investors to invest money in mutual fund. Lets read about the difference between mutual fund and SIP.
What is mutual fund?
When you think about investing money, lot of options are available. Like, stocks, mutual fund, property, commodities, gold, etc etc. But the most popular investment option is mutual fund.
Mutual funds: According to the Association of Mutual Funds in India, mutual fund is a pool of money managed by a trust that collects money from a number of investors sharing similar investment objectives and invests the same in equities, bonds, money market instruments, and/or other securities.
Mutual funds are the most popular investment vehicles and suitable for investors whose investment amount is small or for those who neither have the inclination or the time to research the market, yet want to grow their wealth. Professional fund managers manage the money collected from the investors in line with the scheme’s stated objective. In return, the investors are charged a small fee by the fund house, which is deducted from the investment. The fees charged by mutual funds are regulated and are subject to certain limits specified by the Securities and Exchange Board of India (SEBI). Either you can invest lumpsum amount in mutual fund or split amount in regular time intervals. And that’s where SIP comes.
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What is Systematic Investment Plan(SIP)?
SIP is Systematic Investment Plan and SIP is a smart mode of investing money in mutual funds. Through SIP, investor can invest pre-determined amount weekly, monthly or quarterly. SIP is flexible option of investment as an investor can increase or decrease amount anytime or stop SIP anytime.
SIP is the best option for new person who is not well aware of financial market as it is a safe option. Why is it safe? Because, you are investing small amount periodically instead of whole lump sum amount at a time.
Investing in SIP is very simple and hassle free. When you choose SIP option, the pre-determined amount is automatically debited from you bank account. And, when money is debited from your account, you receive mutual fund units in your account based on Net Asset Value (NAV) of your fund.
What is Lumpsum Investment Plan?
As the name suggests, investor with significant cash in hand can choose to invest in lump sum mutual fund depending on the his financial plan, investment goals and horizon. When investor invests lumpsum amount, he get to purchase all the units in single transaction whereas units are purchased in multiple intervals in case of SIP. For example, if investor invests Rs12000 as lumpsum, he makes a single payment to complete the investment process and units are purchased at one time. But in SIP, investment amount is broken and invested in fixed time intervals like Rs1000 every month for 12 months. So, units are purchased every month.
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Difference between mutual fund and SIP
1. Investment Mode
When investor choose SIP as a mode of investment, he makes regular payments to purchase units of mutual funds. This develops the habit of regular investment and so savings.
2. Power of Compounding in SIP Investments
As small amount invested regularly can generate more more gains as compared to investment of lump sum amount. The benefit of compound interest ensures long term returns as compared to one time investment.
3. Rupee Cost Averaging
When you invest money, the units of mutual fund is bough according to market rate. So, when market is performing low, Investor buy more units and when market is performing high, investor buy a smaller number of units. So, it reduces cost of investment and increases high gains.
On the other hand in lump sum mode of investment, investor may purchase all the units at a price which can be higher so investors don’t get the benefit of averaging.
4. Flexibility
Lumpsum investment in a mutual fund scheme is suitable for investors who have bulk surplus money to invest. But, SIP investment gives investors higher flexibility to invest small amounts on a regular basis either weekly, quarterly or monthly as per your convenience. Hence SIP is best for salaried people or for persons having regular cash flows.
5. Volatility
New investors are often confused about the best time to enter the market. If lumpsum amount is invested then there would always be query about purchase timing as market is highly volatile.
But with SIP, investor buys mutual fund units slowly over time and so only some part of entire investment will face higher than usual market volatility.
SIP also brings financial disciplines in ones life. People are forced to invest regularly and manage other expenses accordingly. It helps in creating wealth.
| SIP | Lump-sum Mutual Funds | |
| Investment style | Investment done in regular intervals | Investment done one time |
| Flexibility | High | Low |
| Purchase Cost | Less due to rupee cost averaging | Can be high as the investment is done in a single transaction |
| Volatility | Less impact of volatility on investment | More impact of volatility on investment |
Take away:
We read about mutual fund vs SIP. Mutual fund is one of the options available for investment. SIP splits investment amount and investor can invest pre decided money in regular intervals. At the end, through SIP, investor invests in mutual fund only.
