What Is the Difference Between SIP and Mutual Fund?
Investors are always on the hunt to find better forms of investment. There are various options in the market, from hedge funds to Systematic Withdrawal Plans (SWP), Unit Linked Insurance Plans (ULIP), Equity Linked Saving Schemes (ELSS), and many others.
But the most prominent are Mutual Funds, where more than 81 lakh investor accounts were added in 2020, and the Systematic Investment Plan (SIP), where almost 91.8 billion net flow of SIP was registered in March 2021, as per RBI data.
Investors are mostly eager to increase their returns without the hassle of tracking their portfolios and trading in the market. Thus, many forms of investment now hire fund managers to trade on behalf of the investor, which saves the investor’s time. Moreover, the fund manager’s professional knowledge will be beneficial in maximizing the profit in the investment.
Both mutual funds and SIP invest in the share market, but there are a few differences between them. In this article, we discuss what mutual funds and SIP mean and the key difference between mutual fund and SIP here.
Mutual Funds
A mutual fund is a form of investment in which an authorized fund house, such as banks and asset management companies, collects money from investors and trades in securities on their behalf, intending to maximize the profit ratio with the lowest risk.
The risk of market movement is reduced because the money is invested in different assets for different investment horizons. When the risk is reduced, a loss in one asset is offset by a profit in another asset in the portfolio.
The investment is done in shares, bonds, and commodities and is known as a portfolio for an individual investor. This portfolio is managed by a finance manager, also known as a fund manager.
Mutual funds are one of the safest forms of investment, where the investment is made in a lump sum form. Various mutual funds aim to achieve certain objectives, such as small-cap, mid-cap, and large-cap funds, index funds, etc.
SIP
SIP is similar to a mutual fund, but the investment is mostly made in lump sum form in mutual funds. Whereas in SIP, a small amount is constantly invested in the fund on a recurring basis.
With SIP, you can invest a minimum of Rs 500 every month or quarter. A fund manager is allocated to invest on behalf of investors in the market in various sectors, such as shares, bonds, and commodities. The aim of the fund manager is to maximize the profit while keeping the risk factor at a minimum.
One of the major benefits of investing in SIP is the power of compounding, where the interest earned on the principal value is reinvested. Over a period, investors yield a higher return of profit.
Mutual Fund vs SIP - The Key Differences Between Mutual Funds and SIP
What is difference between sip and mutual funds is often a common question asked by new investors. Let us find out the difference between SIP and mutual fund in detail here-
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Investment Value
The investment in mutual funds is made in lumpsum form, while the investment in SIP is made in smaller recurring amounts on a monthly or quarterly basis.
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Investment Form
The investment is made in debt instruments, debt mutual funds, equity mutual funds, and hybrid instruments, which are a mix of both equity and debt funds.
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The Volatility of the Market
The market is constantly changing into a bearish trend and a bullish trend. These ever-changing market trends have a larger impact on mutual funds than on SIP, as the investment value of mutual funds is higher than that of SIP.
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Charges
The AMC (Annual Maintenance Charge) and the other charges, like transaction cost, are higher in mutual funds than in SIP as the investment value of a mutual fund is larger.
In mutual funds, the charges incurred by way of the fund manager’s fees and the transaction value is on the higher side, while in SIP, the investment value and the trade value are always on the lower side.
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Redemption
Both SIP and mutual funds are highly liquidated forms of investment. The only difference is the redemption charges are on the higher side in mutual funds than in SIP.
A Mutual Fund is an investment vehicle allowing you to gain exposure to stocks, bonds, or other financial instruments. While a SIP is a tool to invest in a Mutual Fund. Comparing Mutual Funds and SIPs is like comparing apples and oranges – they are two completely different concepts. A mutual fund is an investment avenue, while a SIP is a method of investing in a mutual fund.
Key Takeaways - SIP vs Mutual Fund
- Mutual funds and SIP are subjected to market risk.
- Mutual funds are a lumpsum form of investment, while SIP is a recurring form of investment.
- The amount of investment in mutual funds is on the higher side, while the investment in SIP is on the lower side.
- Mutual funds and SIP have taxation benefits under Section 80C of the Income Tax Act, where the investor can claim up to Rs 1,50,000 exemption.
Disclaimer: This blog is solely for educational purposes. The securities/investments quoted here are not recommendatory.