Difference Between SIP and Mutual Fund – Which One is Better for Investing?
What is SIP?
SIP or Systematic Investment Plan is an investment method where investors invest a fixed amount of money at regular intervals in a mutual fund scheme. This helps in reducing the impact of market volatility on the investments and allows investors to accumulate wealth over time by taking advantage of the power of compounding.
What is a Mutual Fund?
A mutual fund, on the other hand, is an investment vehicle where several investors pool their money to invest in a portfolio of stocks, bonds, and other securities. The fund is managed by a professional fund manager who invests the pooled money in a diversified portfolio of securities to generate returns for the investors.
Differences Between SIP and Mutual Fund
Investment Mode: The primary difference between SIP and mutual funds is the investment mode. SIP is a method of investing in mutual funds, whereas mutual funds are an investment vehicle.
Investment Amount: When investing in a mutual fund, investors can invest a lump sum amount, whereas in SIP, investors can invest a fixed amount at regular intervals.
Timing of Investment: In mutual funds, investors can buy or sell units anytime during the market hours, whereas in SIP, units are bought at regular intervals irrespective of market movement.
Risk Level: Mutual funds are considered high-risk investments as they involve direct exposure to the stock markets, whereas SIPs are considered to be low to moderate risk investment, depending on the kind of mutual funds the investor invests in.
Costs: Mutual funds have various charges, such as entry and exit loads, management fees, etc. In comparison, SIPs have lower fees as the money is invested over time rather than at a single point in time.
Which One is Better?
Both SIP and mutual fund investments have their advantages and disadvantages. It depends on an individual’s investment objectives, risk appetite, and investment horizon. For short-term investments, SIP may be a better option, whereas for long-term wealth creation, mutual funds can prove to be a better option.
To conclude, before making any investment decision, investors must evaluate their investment objectives, consult a financial advisor and evaluate their risk appetite. They must also compare the charges and returns of various mutual fund schemes to make an informed decision.
Table difference between sip and mutual fund
SIP vs. Mutual Fund
| Parameters | SIP | Mutual Fund |
|---|---|---|
| Definition | A Systematic Investment Plan (SIP) is a mode of investing in mutual funds regularly, where the investment amount is deducted automatically from the bank account of the investor. | A mutual fund is a type of investment where money is pooled from various investors and managed by a professional fund manager to achieve the investment objectives. |
| Costs | Investors can start with low investments with an SIP, and the cost of the SIP is comparatively lower than a mutual fund as it doesn’t require a lump sum investment. | In mutual funds, the costs are higher than SIPs as the cost of the fund manager’s expertise, the management of the fund, and portfolio selection expenses are also included. |
| Investment | An SIP is best suited for those investors who cannot invest a lump sum at one go and are looking to invest regularly with smaller amounts. It helps in reducing the risk associated with investing in the stock market. | Mutual funds are best suited for those investors who have a lump sum amount and want to invest in equity, debt, and other markets to get higher returns. |
| Flexibility | An SIP is highly flexible, as investors can start, stop or pause the investment at any time, and can also increase or decrease the amount invested. | Mutual funds are not as flexible as SIPs as investors can only invest a lump sum amount or halfway through a mutual fund scheme. |
| Risk | The risk involved in SIPs is comparatively lower as the investment is done regularly in small amounts instead of a lump sum amount. | The risk involved in mutual funds is higher as it involves investing in equity markets, which can be volatile at times, and the returns are not guaranteed. |
| Return | The returns are comparatively lower in SIPs as the investment is done regularly in small amounts. | The returns are higher in mutual funds as it involves investing a lump sum amount with the potential to earn higher returns. |