SIP vs. Mutual Fund: What's the Real Difference?

Investment is one of the best ways to secure your financial future and achieve your financial goals. Among the various investment options available, including hedge funds, Systematic Withdrawal Plans (SWP), and Equity Linked Saving Schemes (ELSS), two of the most prominent are Mutual Funds and Systematic Investment Plans (SIPs).

Table of Content

• Mutual Fund
• SIP
• Mutual Fund Vs. SIP: Key Differences

According to RBI data, over 8.1 million mutual fund investor accounts were added in 2020, and there was a net inflow of approximately ₹91.8 billion into SIPs in March 2021. This surge highlights the growing popularity of these investment vehicles.

Despite their importance, there are still many who find themselves confused between these two terminologies. To help you understand the difference between mutual funds and SIP, here is a detailed guide that will give you a clearer picture:

Mutual Fund

Mutual funds are a form of investment where authorized institutions, such as banks and asset management companies, pool money from multiple investors to purchase a diversified portfolio of securities, such as stocks, bonds, or other assets. This portfolio is managed by a finance manager, also known as a fund manager, who invests based on funds objective.

By diversifying investments across various assets and time horizons, mutual funds help reduce the impact of market fluctuations. Losses in one asset can be offset by gains in another, reducing overall portfolio risk.

Investing in mutual funds allows you to own a diversified and professionally managed portfolio, even with a small amount of capital.

SIP

SIP or systematic investment plan is essentially a hassle-free and disciplined method of investing in mutual funds. Through SIP, you can regularly invest a fixed amount of money at predefined intervals, such as daily, monthly, weekly, or early. You can also start with a small amount and gradually increase it over time.

One of the key advantages of investing through a SIP is the power of compounding. This process involves reinvesting the interest earned on the principal amount, allowing your investment to grow exponentially over time. As a result, investors can achieve significantly higher returns on their investments over the long term. To know your potential returns on mutual fund investment, consider using a mutual fund calculator.

Mutual Fund Vs. SIP: Key Differences

Here are some key differences between mutual funds and SIPs:

Investment Approach

Investments in mutual funds are usually made in a lump sum, whereas, in SIP, the investment is made in smaller recurring amounts on a monthly or quarterly basis.

Investment Form

To invest in mutual funds, you can make investments in two forms, SIP or lump sum. SIPs, on the other hand, are a form of investment in mutual funds, involving investing a certain amount of money periodically.

Risk Mitigation

In mutual funds, the risk can be high or low depending on the type of mutual fund, market timing, investment frequency, etc. Some mutual funds may expose investors to higher risks, while others are more conservative. On the other hand, by investing regularly over time, SIPs mitigate the risk of market timing, reducing the impact of market volatility.

Returns

Mutual funds have the potential to deliver high returns over the long term, but they also come with a higher level of risk. In contrast, SIPs can also yield significant returns over time but with comparatively lower risk. Additionally, SIPs allow investors to benefit from compounding, making it easier to achieve favourable returns even at varying SIP investment interest rates.

Redemption

Both SIPs and mutual funds are highly liquid investment options, allowing investors to access their funds relatively easily. However, one key difference is that redemption charges tend to be higher for mutual funds compared to SIPs. This means that while both options offer liquidity, the costs associated with redeeming investments can vary.

Flexibility

SIPs are a more flexible option, allowing you to invest in small regular instalments spread over an investment period. That’s why, SIPs are better suited for salaried investors, as they will be easily able to invest in them without disturbing their current lifestyle.

Lump sum investments are better suited to investors who have surplus funds that they can use to invest in one go.

Charges

While the specific costs can vary based on the fund house, mutual funds generally have higher charges compared to SIPs. This is primarily because of larger investment amounts typically involved in mutual funds. Factors like AMC (Annual Maintenance Charge), transaction costs, and fund manager fees contribute to the higher overall expenses.

In contrast, SIPs, with their regular, smaller investments, often result in lower charges due to the smaller investment and transaction values.

Overall, both mutual funds and SIPs offer unique benefits, catering to different types of investors. When deciding between mutual funds and SIPs, consider your financial goals, risk tolerance, and investment horizon. Remember, the best return mutual fund for you depends on various factors. It's essential to do thorough research and consider factors like the fund's performance history, expense ratio, and investment strategy.

Ready to start your investment journey? Muthoot Finance offers a wide range of best-return mutual fund options and SIP plans, helping you find the perfect fit for your financial goals. Visit our website or consult with our financial experts for personalized guidance.