A well-planned investment is the first step towards long-term financial stability. A systematic investment plan is a way of investing in mutual funds, whereas mutual funds are the actual investment product. They both play an important role in helping individuals grow their wealth steadily. This article explains the key differences between SIP and mutual funds to help you make better investment decisions.
Understanding SIP
SIP is an organised way of making investments. With the help of SIP, investors can build capital by making small and regular investments at a predefined interval. They can select the interval, like weekly, monthly, or quarterly. Investors can also choose the auto debit option to automatically make withdrawals from their bank accounts. Depending on their financial situation, investors can also change the amount they invest.
Understanding Mutual Funds
A mutual fund is an investment product that combines the capital of multiple investors and then invests in a diversified portfolio of stocks, bonds, and other securities. The mutual fund schemes are introduced by the asset management companies or fund houses. These funds are managed by professional fund managers, and decisions are made on behalf of the investor.
SIP vs Mutual Funds
SIP is a method of investing in mutual funds; it is not a separate investment option. Both lump sum and SIP are ways to invest your capital into mutual funds, but they have differences. Here are the key differences between them:
Investment Amount
In a lump sum option, you invest a large amount in one go. Whereas in SIP, you invest smaller, fixed amounts at regular intervals, such as monthly or quarterly. This makes SIPs a suitable option for those who prefer to start gradually.
Market Impact
In a lump sum, as the entire amount is invested, it is more likely to be affected by the market fluctuations. In SIPs, the investment is spread over time; this helps in balancing the effect of market ups and downs through cost averaging.
Charges and Costs
Both these methods involve expenses like fund management fees and transaction charges. The percentage of the fees is the same, but a lump sum might seem costlier because of the larger amount invested upfront.
Liquidity and Withdrawals
Whether you invest via SIP or lump sum, withdrawals are subject to the fund’s exit load and redemption rules. In lump sum investments, the exit load amount may appear higher due to the larger capital involved.
Risk Management
The lump sum investments can deliver higher returns if the market rises soon after you invest, but they also have risk if markets fall. On the other hand, SIPs reduce timing risk since investments are spread out, making them less volatile for most investors.
Suitability
Lump sum investing is suitable when you have a large amount ready and can handle market instability. SIPs are suitable for people with regular income who want to invest consistently without worrying about timing the market.
Psychological Comfort
For many investors, SIPs feel less stressful since they don’t need to commit all their capital at once. Lump sum investing, on the other hand, can create more anxiety during market downturns.
SIP in Mutual Funds – How It Works
After understanding what mutual funds and SIPs are, let’s understand how they work together.
When you start an SIP in a mutual fund, you invest a fixed amount at regular intervals; it can be every month or quarter. On each due date, the chosen amount is automatically deducted from your bank account and invested into the mutual fund scheme that you have selected.
Once the capital is invested, then the fund house allocates mutual fund units based on the scheme’s Net Asset Value (NAV) on that specific day. Each SIP instalment buys units at the current NAV, which means the number of units you get will be different depending on the market performance.
Over time, each new SIP contribution adds more units to your account; this helps you steadily grow your investment.
For example, suppose you decide to invest ₹6,000 every month in an equity mutual fund on the 5th of each month. Each month, your ₹6,000 will buy as many units as the current NAV allows, gradually building your portfolio through regular contributions. You can easily set this up and track it using a SIP app, which automates payments and monitors your progress.
Conclusion
SIP and mutual funds are interconnected. Mutual funds are an investment product, whereas SIP is simply a disciplined method of investing in them. Understanding the difference between the two helps you choose the right approach based on your financial goals, risk appetite, and available capital. There are many fund houses like Axis MF that provide a variety of schemes across different asset classes, helping investors to choose options that are suitable for their needs and preferences.
