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What Is The Difference Between SIP & Mutual Fund? SIP v/s Mutual Fund

Let us see the difference between SIP and mutual fund investment through lump sum method

difference between sip and mutual fund
difference between sip and mutual fund

Mutual Fund investments are treated as an easy and comfortable way of investing in stocks by many investors. Professional experts, in the form of fund managers, manage and operate mutual funds. Before investing in stocks they do all the research and analysis of companies, their fundamentals, movement trends in the stock price and future prospects. Based on the results, the fund managers select the most suitable investment option 

An investor need not worry, beyond reason, about their money being invested in the stock market through mutual funds. Their investments are backed by a research team and a fund management team. 

Since the money is invested in different assets for different investment horizons, the risk of market movement reduces. With reduced risk, the loss in one asset is off-set with profit from another asset in the portfolio.

An investor might not have the time or expertise to monitor and interpret the movement in stocks. This is where the fund managers come to the rescue, they take the correct decision at the correct time

Now that we know about the merit of investing in mutual funds, Let us see the difference between SIP and mutual fund investment through lumpsum investments method

Systematic Investment Plan SIP is a method of investment in a mutual fund and not a product.

In this article, we have explained the difference between mutual funds and SIP.

What is a Mutual Fund?

A mutual fund is a pool of money gathered from investors with an objective of investing to achieve a common objective. The investments can be made in various assets like equity, bonds, and money market instruments to earn returns while achieving the stated objective.
It is professionally managed by an asset management company (AMC) and each investor participates proportionally to the number of units held by him or her.
A mutual fund is a type of investment vehicle that invests in either a portfolio of stocks or bonds and other securities or a combination. 
Mutual funds have the ability to give investors access to diversified, professionally managed portfolios at a low price. These are categorized based on the kinds of securities they invest in, their investment objectives, and the type of returns.

They charge annual fees (called expense ratios) and other charges in return for the management of the fund on behalf of investors.

What is SIP?

A systematic investment plan SIP is a way of investing in mutual funds. It is just a process through which you can contribute small but regular amounts to invest in a mutual fund and build a good corpus over a period of time.

It brings discipline to investing a fixed amount on a regular basis like weekly, monthly, or quarterly among investors. SIP helps an investor invest in installments while keeping his/ her monthly income and expenses planned and in sync
It is very important to start investing, even in smaller denominations. 

What is lump sum investment?

Now that we know what SIP is, let us understand lump sum investment in mutual fund as well.

SIP and the lumpsum investments are simply two ways to invest in a mutual fund. In SIP investments a fixed amount is invested on a fixed interval basis and in lump sum you invest in one shot

An investor with significant cash in hand can choose to invest in lump sum mutual fund depending on the financial plan, investment goals, horizon. Whereas an investor with periodic income can choose to invest in SIP

When you are investing in a mutual fund by paying a lump sum you get to purchase all the units in a single transaction. For example, if you want to invest Rs. 12,000 in the mutual fund scheme then you make one single payment to complete the investment amount plan.

In the case of SIP, the same investment amount of Rs. 12,000 is spread across 12 months, where you have the flexibility to purchase units by investing Rs. 1000 every month.

So going by the above statement, SIP is not a product, type of investment option or instrument in itself. It is just a process through which you can contribute small but regular amounts to invest in a mutual fund and build a good corpus over a period of time.

SIP is usually considered a good method if you have a long-term investment goal.

Differences between SIP and Mutual Funds

1. Investment Mode

While using SIP as a mode of investment you make regular payments to purchase units of mutual funds. This inculcates the habit of investing regularly.

2. Power of Compounding in SIP Investments

In SIP an investor invests in a disciplined way at a regular basis and accumulates wealth over a period of time. SIP can be considered as a better route to achieve the financial plan and investment goals.

Mutual funds provide an investor with an option either to reinvest the earnings or returns. If instead of withdrawing an investor reinvests in the same plan he can enjoy the benefits of power of compounding.

3. Flexibility

Through SIP investments you have higher flexibility, where you can invest small amounts on a regular basis either weekly, fortnightly or monthly as per your convenience. Hence SIP is best for salaried people or for persons having regular cash flows.

SIPs allow you to invest in mutual funds without disturbing your present lifestyle and expenditure pattern.

Lumpsum investment in a mutual fund scheme can be done generally when f you have bulk surplus money. 

4. Lower Cost

If you invest in SIP, you can benefit from cost averaging. This means that you can lower the overall cost of purchase by buying more units when the market is down and lesser units when the market is up.

This helps you to reduce your average cost of purchasing.

On the other hand in lump sum mode of investment, you end up purchasing all the units at a price which can be higher as you do not get the benefit of averaging.

4. Volatility

Investors, especially new ones are often confused about the best time to enter the market. If you invest in a lump sum manner there is always the question of timing the purchase and thus exposure to high volatility periods.

With a SIP, the purchase is spread over time and only some parts of your entire investment will face higher than usual market volatility.

ParametersSIPLump-sum Mutual Funds
Investment wayRegular One time
FlexibilityHighLow
CostLess due to rupee cost averagingHigh as the investment is done in a single transaction 
VolatilityLess impactMore impact

Top Performing Mutual Funds for SIP in India

Below mentioned are the top performing mutual funds to invest through SIP
Fund NameCategory
Kotak Standard Multicap Growth.Multi Cap Fund Growth
Motilal Oswal Long Term Equity Fund-Regular Plan-GrowthTax Savings Scheme
Mirae Asset Large Cap Fund Regular GrowthLarge Cap Fund Regular Growth
Axis Bluechip Fund GrowthLarge Cap Fund Growth
Invesco India Growth Opportunities Fund-Growth Diversified Fund
Mirae Asset Tax Saver Fund – Regular Plan-GrowthTax Savings Scheme

Conclusion

We hope this has helped you to understand the differences between SIP and mutual fund investment. And now you will be able to evaluate when it comes to SIP vs mutual funds

SIPs offer flexibility, lower cost due to averaging, and offer an effective way to manage volatility. It’s simply a smarter way to invest.

While debating on SIP vs mutual funds, an investor must consider his/ her convenience of investing based on income and earnings. You can use Scripbox’s lumpsum calculator to get an estimate of wealth gained and maturity value

You may also like to read ULIP vs Mutual fund which is a better investment option

Published on March 9, 2020