Mutual Fund vs. SIP: What’s the difference

When you're venturing into the world of mutual funds, you might encounter the term "SIP," which stands for Systematic Investment Plan. Now, it's common for newcomers to assume that SIP and mutual funds are the same thing. However, that's not the case.

Mutual funds refer to a pool of funds collected from multiple investors, which are then invested in various securities such as stocks, bonds, or other asset classes. On the other hand, SIP is just one method of investing in mutual funds. Understanding the difference between SIP and Mutual Funds is crucial for making informed investment decisions.

While mutual funds represent the investment vehicle itself, SIP is a strategy or approach to investing in mutual funds. Knowing how to use both SIP and Mutual Funds effectively can be instrumental in achieving your financial goals. Read on to know more about them.

What are Mutual Funds?

Let’s understand Mutual Funds with an analogy of a tour operator.

Let’s assume you want to spend the summer holidays at some cool places in India, but you don’t have time to plan an itinerary. A tour operator can help you solve this problem by assisting you with the best places to visit, mode of transport, car rentals, hotel booking, etc. as per your budget and preferences. Similarly, if you don’t have time or wherewithal to manage your investments, then mutual funds can be an ideal investment destination for all your investment needs. Now let’s understand how they work.

Mutual funds collect a pool of money from different investors and invest them in a portfolio of market-linked instruments like stocks, bonds, money market instruments, gold, etc. In simple terms, it is a vehicle through which you can invest in different investment avenues. They are managed by professional fund managers who are experts in analysing and managing investments to maximise returns and minimise risks.

Investors are allotted units in the proportion of their holdings in the overall investments. These units are priced at net asset value (NAV) which is computed on a daily basis. Mutual funds charge expenses to manage your funds which are adjusted in the NAV.

What is SIP?

To put it simply, the process of SIP investing is similar to a bank's recurring deposits.

It is a mode of investment offered by mutual funds in which you can stagger your investments at regular intervals. You can invest a fixed sum of money at a pre-determined frequency like weekly, monthly, quarterly, etc.

Imagine you decide to save ₹1000 from your salary every month by buying a small piece of a big investment cake. Over time, these small pieces can grow into a larger share because of the market's ups and downs. The beauty of SIP is it teaches you discipline by saving regularly, reduces the worry of entering the market at the wrong time, and allows your money to grow thanks to the magic of compounding.

What is the difference between SIP and Mutual Funds?

While SIP has become a popular investment choice and is often used synonymously with mutual funds, here are the differences that you should know:

• Investment method: Mutual funds are investment products, and SIP is one of the methods of investing in them. SIP allows you to make fixed contributions at regular intervals. Another method of investing in mutual funds is lump sum investment, where you can invest a larger amount at once.
• Capital requirement: With SIP, you can start investing with a relatively small amount regularly, making it accessible to a wider range of investors. Mutual Funds, on the other hand, can also be entered through a lump sum investment, appealing to those who prefer making one-time investments.
• Managing risk: The risk associated with mutual funds depends on the underlying securities held in the portfolio. For instance, equity funds are riskier than debt funds but also offer the potential to generate higher returns. This risk persists whether you invest through SIP or on a lump sum basis. However, SIP can help mitigate some risks associated with market timing by investing regularly and reducing the impact of market fluctuations.

SIP vs Lumpsum: Which is better for you?

Imagine you’ve just received your yearly bonus of ₹1,00,000. Now, you’re faced with a choice: invest it all at once (lump sum) or invest a bit of it every month (SIP).

Let’s say you decide to invest it all in an Equity Mutual Fund. That’s your lump sum investment. If the market is in uptrend, your investment could grow significantly. However, if the market takes a downturn shortly after you invest, your entire sum is affected.

Now, consider the SIP approach. Instead of investing the entire ₹1,00,000, you choose to invest ₹8,333 every month for 12 months. This way, you’re investing into the same Equity Mutual Fund, but you’re spreading out your investment over time. If the market dips in one of those months, you’re actually buying more units of the fund at a lower price, which could benefit you if the market recovers later. This strategy can lessen the risk of investing a large sum at an inopportune time and benefit you from the rupee cost averaging.

So, using this example, if you’re unsure about market conditions or prefer to spread out your investment to manage risk, opting for SIP would be a prudent choice. If you have a good sense of the market and believe that the timing is right for a larger investment, then going with a lump sum could potentially offer higher returns.

Also Read: What is a Mutual Fund & how do they work?

Conclusion

Mutual Funds can play a crucial role in your investment portfolio and your wealth creation journey. Investing in Mutual Funds through SIP provides various benefits like disciplined approach, rupee cost averaging, it negates market timing, is lighter on wallet and offers convenience and flexibility. Understanding your financial goals, risk appetite, and investment horizon is key to determining which option suits you best between SIP and lumpsum.

With offerings from numerous Asset Management Companies (AMCs), Axis Bank extends the empowering choice to its customers to start a SIP in Mutual Funds, ensuring that the journey towards financial aspirations is as smooth and systematic as possible.

FAQ

Which is a better form of investment for an investor with a lower regular income?

SIP is generally better for investors with a lower regular income, allowing them to invest small amounts periodically. You can start a SIP with an amount as low as Rs 500 and at a frequency (weekly, monthly, quarterly, etc.) that is convenient to you.

To maximise profits, which is better: Mutual Funds or SIP?

Mutual funds serve as investment vehicles, with SIP presenting itself as one of the methods for investing in them. SIP provides a disciplined approach to investing, potentially averaging out costs. Mutual funds are one of the best investment avenues for creating wealth in the long term, and SIP is the prudent way to benefit from mutual fund investing.

Which option provides a more diversified portfolio?

Mutual funds inherently offer diversified portfolios. Whether you invest a lump sum or through SIP, you will receive the same benefits of a diversified portfolio. SIP spreads your investments over a period of time, providing you with the benefits of cost averaging and smoothing out market volatility.

For the long term, which is the most preferred form of investment?

If you're uncertain about market conditions or prefer to spread out your investment to manage risk, choosing SIP would be a prudent decision. Conversely, if you have a strong grasp of the market and believe that the timing is optimal for a larger investment, opting for a lump sum may potentially yield higher returns. To determine which option, SIP or lump sum, best suits you, it depends on your understanding about markets, financial goals, risk tolerance, and investment horizon.

Is SIP safer than Mutual Funds?

SIP is simply a method of investing in mutual funds; the level of safety depends on the underlying assets and management of the mutual fund.

Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.

Mutual Fund investments are subject to market risk, read all scheme related documents carefully. Axis Bank Ltd is acting as an AMFI registered MF Distributor (ARN code: ARN-0019). Purchase of Mutual Funds by Axis Bank’s customer is purely voluntary and not linked to availment of any other facility from the Bank. T&C apply.