SIP vs Mutual Fund

SIP (Systematic Investment Plan) is a disciplined way to invest in mutual funds, allowing regular, periodic investments. While a mutual fund is an investment vehicle, SIP helps investors build wealth gradually by investing fixed amounts over time, aligning with financial goals.
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Difference Between SIP and Mutual Fund
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4 mins read
27-March-2025

A Systematic Investment Plan (SIP) is a disciplined way of investing in mutual funds, where a fixed amount is contributed at regular intervals. In contrast, mutual funds are investment instruments that pool funds from multiple investors and allocate them across various asset classes, such as equities, bonds, and money market instruments, to generate potential returns.

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In this article, you will learn about SIP vs mutual fund – Comparison and differences between them.

What is SIP?

Systematic Investment Plan (SIP) is a disciplined and hassle-free approach to investing in mutual funds. It involves regularly investing a fixed amount at predefined intervals, typically monthly or quarterly. Investors can start with a small amount and gradually increase it over time. SIPs offer the benefit of rupee cost averaging, as more units are bought when prices are low and fewer when prices are high. This strategy helps mitigate the impact of market volatility, making it an ideal option for long-term wealth creation.

What is a mutual fund?

A mutual fund is a professionally managed investment vehicle that pools money from various investors to invest in a diversified portfolio of stocks, bonds, or other securities. Each investor in the fund owns shares, which represent a portion of the holdings of the fund. Mutual funds provide an opportunity for individuals to access a diversified and professionally managed investment portfolio, even with relatively small amounts of capital. They are overseen by fund managers, who make investment decisions based on the fund's objectives.

Difference between SIP and mutual fund

SIP stands for Systematic Investment Plan, serving as a method for investing in mutual funds. Through a mutual fund SIP, you can systematically invest over time, building a fund to address diverse financial objectives. Understanding these distinctions, let us explore their differences:

Features

SIP

Mutual Fund

Investment approach

SIP involves investing a fixed amount at regular intervals. It is a disciplined approach that encourages regular savings and minimises the impact of market fluctuations.

Investors can choose to invest a lump sum amount or make periodic investments (like SIPs). The fund manager makes investment decisions based on the fund's objective and strategy.

Risk mitigation

SIPs help mitigate the risk of market timing, as investments are spread over time, reducing the impact of market volatility.

Risk can be low to high, depending on the type of mutual funds, investment frequency, market timing, etc.

Returns

Potential for higher returns over the long term.

Potential for higher returns over the long term, but also high risk.

Flexibility

Can be discontinued or changed at any time.

Can be difficult to sell or redeem units, especially in closed-ended funds.

Affordability

SIPs offer the flexibility of investing smaller amounts at regular intervals, making it more accessible for investors with varying budgets.

Mutual fund investment may or may not be affordable in the case of SIP, lump sum investment
Volatility SIPs, on the other hand, spread purchases over time, reducing exposure to prolonged market swings.

Newcomers often grapple with the optimal market entry timing, particularly in lump sum investments. Such investments raise concerns about timing and expose investors to heightened market volatility.

Investment Form

 SIP is a form of investment in mutual funds, this involves investing a certain amount of money on a periodic basis. 

Investment in mutual funds can be made in two forms, i.e. SIP or Lump sum. 


Understanding these distinctions helps in making informed investment choices. Whether you prefer the disciplined approach of an SIP or the flexibility of a lump sum, knowing your options is key.

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Sip Vs Mutual Fund - A detailed overview

A common query among new investors is the distinction between Systematic Investment Plans (SIPs) and mutual funds. Let's delve into the key differences between these investment vehicles.

1. Investment structure

  • SIP: A periodic, typically monthly, investment in a mutual fund.
  • Mutual fund: A collective investment scheme where investors pool their money to purchase securities managed by a professional fund manager.

2. Investment approach

  • SIP: A disciplined approach to investing, often used to accumulate wealth over time.
  • Mutual fund: Can be invested in a lump sum or through SIPs.

3. Market volatility:

While both SIPs and mutual funds are subject to market fluctuations, SIPs can offer a degree of risk mitigation due to the averaging effect of investing consistently over time.

4. Costs

  • SIP: Generally lower costs due to smaller investment amounts.
  • Mutual fund: Higher costs, including fund management fees and transaction charges, especially for lump sum investments.

5. Redemption:

Both SIPs and mutual funds are generally liquid, allowing investors to redeem their investments. However, redemption charges may vary between the two.

Liquidity and Lock-in period

When choosing between SIP (Systematic Investment Plan) and Mutual Funds, understanding liquidity and lock-in periods is crucial.

A. SIP (Systematic Investment Plan)

1. Liquidity

SIPs offer limited liquidity since withdrawing funds early may disrupt the investment strategy. However, investors can redeem units anytime, subject to exit loads in some cases.

2. Lock-In Period

Most SIPs have no mandatory lock-in period. Investors can start, pause, or stop contributions as needed, except in tax-saving funds like ELSS, where each SIP installment is locked for three years.

B. Mutual Funds

1. Liquidity

Mutual funds provide high liquidity, enabling investors to redeem units anytime at the prevailing Net Asset Value (NAV). This flexibility makes them suitable for varying financial needs.

2. Lock-In Period

Certain mutual funds, such as ELSS, have a mandatory lock-in period, restricting withdrawals before completion.

Advantages of investing in mutual funds

Mutual funds offer a compelling option for many investors seeking to grow their wealth. Here are some key advantages of mutual funds that make them so attractive:

  • Risk minimisation: Mutual funds excel at diversifying your investment portfolio. This means your money is spread across various assets, such as stocks, bonds, and commodities. Diversification is crucial because it reduces the risk associated with any single investment. If one asset class performs poorly, the impact is lessened by the potentially positive performance of others in your mutual fund.
  • Expert management: Unlike picking individual stocks or bonds, mutual funds offer the expertise of professional fund managers. These experienced individuals conduct in-depth research and make buy-sell decisions based on market conditions and the fund's investment strategy. This allows you to benefit from their knowledge and experience without the time commitment of actively managing your own portfolio.
  • Tax advantage: A significant benefit for many investors is the tax advantage offered by Equity Linked Saving Schemes (ELSS) mutual funds. ELSS investments qualify for a tax deduction under Section 80C of the Income Tax Act, 1961. This means you can potentially reduce your taxable income by up to Rs. 1,50,000 annually simply by investing in an ELSS mutual fund.

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Advantages of investing in SIPs

Systematic Investment Plans (SIPs) are a fantastic way to build wealth in mutual funds, perfect for anyone who wants to start investing but might feel overwhelmed. Here is how SIPs can empower you:

  • Start small, dream big: Do not let a limited budget hold you back. SIPs let you begin with a tiny amount, sometimes just a few hundred rupees. Think of it like regularly saving a portion of your allowance or pocket money – small steps that lead to big results.
  • Become a savings master: SIPs cultivate the habit of consistent saving. Just like setting aside dedicated time for homework or sports, SIPs instill the discipline of regular investment. This consistency is key to achieving your financial goals.
  • Market timing: Forget stressing about the ‘perfect’ time to enter the market. With SIPs, you invest regularly, regardless of market ups and downs. This approach, known as rupee-cost averaging, can actually benefit you in the long run.
  • Rupee-cost averaging: Your Friend: Imagine buying groceries. When prices are low, you get more for your money. SIPs work similarly. During market dips, your regular investments buy more mutual fund units. Conversely, when the market is high, you purchase fewer units. Over time, this helps average out your investment cost.
  • The power of compounding: Think of compounding as a snowball rolling downhill. Your investments grow not just on the initial amount, but also on the returns it generates. The earlier you start, the bigger the snowball becomes.
  • Flexibility is key: Life can be unpredictable. SIPs offer the freedom to start, stop, or adjust your investment amount at any time without penalty. This flexibility allows you to adapt your plan as needed.
  • No big lumpsums required: Unlike some investments, SIPs do not require a hefty initial investment. You can start small and gradually increase your contributions as you get comfortable. This allows you to assess the performance of the mutual fund before committing larger amounts.

SIP In Mutual Funds – How they work?

A Systematic Investment Plan (SIP) allows investors to invest a fixed amount in mutual funds at regular intervals, such as monthly or quarterly. This disciplined approach helps in rupee cost averaging, reducing the impact of market volatility.

When an investor opts for an SIP, the amount is automatically deducted from their bank account and used to purchase mutual fund units at the prevailing Net Asset Value (NAV). Over time, SIPs enable wealth creation through the power of compounding.

One of the key benefits of SIPs is affordability, as investments can start with as little as Rs. 500. Additionally, SIPs help in maintaining financial discipline and reducing the risk of investing a lump sum during market highs.

SIPs are ideal for investors seeking long-term growth while managing risk effectively. They provide flexibility to increase or pause contributions as per financial goals.

Factors to consider before choosing between SIP vs mutual funds

Here are a few factors to consider before choosing:

  • Investment horizon: The investment horizon, or the duration for which an investor intends to stay invested, is crucial in deciding between SIP (Systematic Investment Plan) and mutual funds. SIPs are suitable for long-term goals due to their systematic and regular investment approach, while mutual funds can cater to both short-term and long-term objectives.
  • Cost of investment: Comparing the costs associated with SIPs and mutual funds is essential. SIPs often allow investors to start with smaller amounts at regular intervals, making them more cost-effective for those with limited funds. On the other hand, mutual funds may have higher initial investment requirements, impacting the affordability for some investors.
  • Risk analysis: Risk tolerance is a key factor in choosing between SIPs and mutual funds. SIPs, with their disciplined and phased investment approach, provide a more risk-mitigated strategy. Mutual funds, depending on their type, may involve varying levels of risk. Assessing one's risk appetite and aligning it with the chosen investment option is crucial.
  • Details of the fund house: Understanding the reputation, track record, and credibility of the fund house offering SIP or mutual funds is vital. A reputable fund house is likely to adhere to ethical practices, have experienced fund managers, and provide transparent and reliable services to investors.
  • Past performance: Evaluating the historical performance of SIPs and mutual funds is essential for informed decision-making. Past performance can offer insights into the consistency and reliability of returns, helping investors gauge the potential of the chosen investment avenue. However, it's important to note that past performance is not a guarantee of future results.

How to start investing in SIP and mutual funds?

  • Systematic Investment Plan (SIP): A method of investing small, regular amounts in mutual funds.
  • Mutual funds: Pooled investments managed by professionals, offering various schemes based on risk and objectives.

Steps to start investing

1. Define your financial goals

  • Identify short-term and long-term objectives, such as education, retirement, or wealth creation.
  • Decide the investment horizon to select suitable mutual funds.

2. Assess your risk tolerance

  • Evaluate how much risk you can afford to take.
  • Choose between equity, debt, or hybrid mutual funds based on your comfort with market volatility.

3. Research and select funds

  • Compare funds based on past performance, fund manager expertise, and expense ratios.
  • Use tools like star ratings and fund fact sheets for better insights.

4. Complete KYC compliance

  • Submit identity and address proofs to complete the mandatory Know Your Customer (KYC) process.
  • This can be done online or offline through fund houses or third-party platforms.

5. Open an investment account

  • Choose a trusted investment platform, such as a financial institution, broker, or app.
  • Link your bank account for transactions.

6. Start your SIP or lump-sum investment

  • For SIPs, set up an auto-debit mandate for monthly investments.
  • Choose the SIP amount and tenure for regular contributions.

7. Monitor and review investments

  • Periodically assess fund performance to ensure it aligns with your goals.
  • Make changes if needed, based on market conditions or financial priorities.

With these simple steps, you can begin your investment journey in SIPs and mutual funds. The key is to stay consistent and regularly monitor your investments.

Do not wait! Start your SIP today and grow your wealth over time.

Starting your journey with SIPs and mutual funds requires proper planning, research, and regular monitoring, ensuring you stay on track towards financial growth.

Which is better: SIP or Mutual Fund?

A Systematic Investment Plan (SIP) and a mutual fund are not alternatives but interconnected. SIP is a method of investing in mutual funds, offering benefits like disciplined savings and reduced market volatility impact. Deciding which is better depends on your financial goals and investment preferences.

SIP is ideal if you prefer investing smaller amounts regularly, making it suitable for individuals with a steady income. It promotes consistent savings and leverages rupee cost averaging, mitigating risks from market fluctuations. This approach suits long-term goals like retirement planning or children’s education.

A lump-sum investment in mutual funds, on the other hand, is more suitable if you have surplus funds. It allows you to capitalise on market opportunities, especially in a rising market. This approach is better for achieving medium- to short-term goals or when market conditions seem favourable.

Ultimately, the choice between SIP and a lump-sum investment depends on your income stability, risk tolerance, and financial objectives. If in doubt, consider consulting a financial advisor to align your strategy with your financial aspirations. Using a combination of both can also balance the benefits of disciplined investing and market-timing opportunities

Key takeaways - SIP vs Mutual Fund

  • SIP is a method of investing in mutual funds through regular, smaller contributions.
  • Mutual funds offer various schemes based on risk tolerance and financial goals.
  • SIPs help inculcate disciplined savings and mitigate market volatility through rupee cost averaging.
  • Lump-sum investments are suitable for investors with surplus funds, capitalising on favourable market conditions.
  • SIPs are ideal for long-term financial objectives, such as retirement or education planning.
  • Lump-sum investments can achieve short- to medium-term goals effectively.
  • Combining SIP and lump-sum investments can balance regular savings with market-timing benefits.
  • Financial goals and income stability influence the choice of investment method.

Conclusion

SIP vs mutual funds - Both offer unique benefits and cater to different investment styles. Understanding your financial objectives and risk appetite is essential in making the right choice. With Bajaj Finserv platform, you can embark on your investment journey with confidence, backed by a platform designed to support your investment needs

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Frequently asked questions

Is a mutual fund the same as SIP?

No, a mutual fund is a financial instrument that pools money from investors, while SIP (Systematic Investment Plan) is a method of investing in mutual funds regularly through fixed contributions.

Is SIP safer than a mutual fund?

SIP is not inherently safer than a mutual fund; it's a strategy for investing in mutual funds

Which is better for the long term: SIP or Mutual Funds?

SIPs in mutual funds are a popular choice for long-term wealth creation, as they enable disciplined investing and benefit from compounding.

How do I know which SIP is better for me?

Choose a SIP based on your financial goals, risk tolerance, and investment horizon, or consult a financial advisor for personalized guidance.

For higher profits, which is better: mutual funds or SIP?

Mutual funds and SIPs are different investment vehicles. Mutual funds include various investment options, while SIP is a method to invest in mutual funds systematically over time. Both can offer opportunities for profit, depending on market conditions and investment strategies.

Can I withdraw SIP anytime?

Yes, SIP investments can be withdrawn at any time. However, the redemption process may take some time, and there could be exit loads or penalties depending on the mutual fund scheme's terms and conditions.

Is SIP tax-free?

SIP investments are not inherently tax-free. Returns from SIP investments are subject to taxation based on the type of mutual fund and the holding period. Equity mutual funds enjoy tax benefits after one year, while debt funds have different tax implications.

Which SIP gives the highest return?

SIP returns vary depending on market performance, fund selection, investment horizon, and risk appetite. There is no guarantee of the highest returns, but historically, equity-oriented SIPs have the potential for higher returns over the long term compared to debt or hybrid SIPs.

What are the risks in mutual funds?

Mutual funds are subject to market fluctuations. The value of your investment can go up or down depending on the performance of the underlying assets (stocks, bonds, etc.) held by the fund.

What are the risks in SIP?

SIPs inherit the market risks of mutual funds. However, SIP's rupee-cost averaging can help mitigate this risk to some extent by buying more units when the market is low and fewer units when it is high.

Should I pause SIP when the market is high?

Generally, no. SIPs encourage long-term investing, and attempting to time the market can be difficult. Staying invested throughout market cycles helps benefit from potential growth over time.

What happens to SIP when the market crashes?

During a market crash, your SIP continues to purchase mutual fund units, potentially at a lower price. This can be beneficial in the long run as you acquire more units at a discount, which could average out the cost per unit over time.

What is SIP for Rs. 5,000 per month for 20 years?

SIP of Rs. 5,000 per month for 20 years can accumulate significant wealth due to compounding. Using SIP calculators with an assumed rate of return, one can estimate the potential corpus at the end of the investment period. The final amount depends on factors like the rate of return, frequency of SIP, and market conditions. If you invest Rs. 5,000 per month for 20 years and get a 12% return on it, the final copus will be around Rs. 49,95,740.

Which SIP gives 15% return?

SIPs don't guarantee fixed returns, but certain equity-oriented SIPs have historically delivered around 15% annualised returns. Investors should research and select SIPs with consistent track records, managed by reputable fund houses, to potentially achieve such returns. Factors like market conditions, fund performance, and investment duration influence actual returns.

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The information contained in this article is for general informational purposes only and does not constitute any financial advice. The content herein has been prepared by BFL on the basis of publicly available information, internal sources and other third-party sources believed to be reliable. However, BFL cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. 

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