What is The Difference Between Mutual Fund And SIP? (2024)

Many people get confused between systematic investment plans (SIP) and mutual funds. While a mutual fund is an investment product, SIP is one of the methods of investing in mutual funds. So, when you invest through SIP, you are actually investing in a Mutual Fund.

Let’s understand in detail the difference between SIP and Mutual Funds. And how SIP helps you invest efficiently in Mutual Funds.

What is SIP?

SIP or Systematic Investment Plan is the popular method of investing in mutual fund schemes. It is a disciplined approach in which you invest a fixed amount of money on a regular basis, typically monthly. Apart from this, you can also invest weekly or quarterly. By investing a small amount via SIP, you can build a substantial corpus for your future. The performance of mutual funds is based on the performance of underlying securities, such as equities, which can potentially deliver inflation-beating returns over the long term. Also, it has the potential to generate higher returns than other traditional investments like fixed deposits, PPF, etc.

It provides an avenue for the regular and disciplined way of investing regardless of market ups and downs. When you invest via SIP, you receive units of a mutual fund scheme hence, when you regularly invest, you get the benefit of rupee cost averaging. That means you receive more units when prices are lower, and lower units when the prices are high on the market. This way, SIP protects you from market volatility, and you accumulate more units, which substantially helps you in wealth creation.

What is Mutual Fund?

A mutual fund is an investment product that pools money from multiple investors and then invests in a diversified portfolio of stocks, bonds, and other securities. Mutual fund schemes are introduced by the AMC (Asset management companies) or the fund houses. These funds are managed by sound financial professionals, known as fund managers, who make decisions on behalf of the investors.

Mutual funds are popular among investors due to their multiple advantages. One of the best features of the mutual fund is its flexibility, wherein you can start your investment with a smaller amount of Rs 100 via SIP. And if you have idle cash, then you can in lumpsum also. Also, you get the advantage of liquidity, where you can redeem your investment anytime. It offers diversification in your portfolio, which helps you spread your portfolio risk across various asset classes.

Mutual Fund Vs SIP

A mutual fund is a professionally managed investment scheme. The scheme is run by an asset management company (AMC) that pools money from several investors like you to invest in stocks, bonds, gold, and other securities. So, Mutual Fund schemes are a financial product that aims to grow your money.

On the other hand, SIP is simply an investment technique. Through SIP, you can automatically invest a fixed sum of money at pre-specified time intervals.

Interestingly, the SIP investing strategy can apply universally across Mutual Funds, your public provident fund, fixed deposits, and even if you have to buy a 2-gram gold coin every month. It simply means investing a fixed sum of money to invest in an asset class at regular intervals.

Nevertheless, SIP is one of the most recommended ways of investing in Mutual Funds. Let us understand how SIPs work to get more clarity.

SIP In Mutual Funds – How They Work?

Now that you have understood about mutual funds and SIP. Let’s understand how SIP in mutual funds works.

When you choose to invest in mutual funds via SIP, you invest a fixed amount on a regular basis, and this amount is debited from your bank account. After this, fund houses process your transaction, and you receive mutual fund units as per the current NAV (Net Asset Value).

Subsequently, when you make a second SIP investment, you will add more units. But here, you will receive units as the prevailing NAV on that day. This way, you will accumulate units in your investment account. Let’s take an example to understand how it works.

Assume, say, you want to invest Rs. 10,000 a month on the first business day of every month in the Nippon India Growth Fund, a mid-cap fund.

SIP Benefits

There are multiple benefits of investing via SIP. Following are some of the benefits of SIP:

1. Affordability: One of the major benefits of the SIP is its affordability. You can start with a minimum investment of as low as Rs 100.
2. Match your income cycle: SIPs often match our income cycle, and some part of the monthly salary can go towards investing.
3. Automatic feature: SIPs are automatic, which makes them the perfect antidote to the problem of people investing when markets are high and withdrawing money when markets are low.
4. Flexible: SIPs are flexible, as they help us do small accumulations and offer compounding advantages.
5. Rupee cost averaging: As you invest a regular amount via SIP, it averages out your total investment cost. You accumulate more units when prices are low and fewer units when markets are higher. So you do not have to worry about when to enter and exit the market,

To make an informed decision about whether to opt for SIP or a lump sum investment, you can utilize the SIP Return Calculator App. This is a valuable tool available to investors, enabling them to assess the potential returns of their SIP investments over a specified period. By inputting parameters such as the investment amount, duration, and expected rate of return, the SIP Return Calculator provides an estimate of the accumulated corpus.

We hope you found this article useful. If you did, please share it with your friends and family and help us reach more people. If you have any questions or you need clarification on what we have written in this blog, do ask us in the comment section below, and we will respond.

Frequently Asked Questions