Understanding the difference between SIP and mutual funds

Understanding the difference between SIP and mutual funds

To differentiate between an SIP and mutual funds is akin to comparing a process and the result of that process. There is nothing to compare or differentiate as one is a product and another is method to opt for that product. In this case, mutual fund is an investment instrument, a vehicle that allows you to gain exposure to different asset classes. An SIP, on the other hand, is merely a method to invest in mutual funds.

What is a mutual fund?

Mutual funds are pooled investment instruments wherein asset management companies raise capital from different investors and put that money in different asset classes, based on the investment scheme’s objective. Each investor is allocated mutual fund units that are proportional to their investment, based on the cost of each unit, i.e., Net Asset Value.

What is an SIP?

A Systematic Investment Plan (SIP) is a method of investing in mutual funds periodically over a span of time, similar to investing in a recurring bank deposit. This is beneficial for you if you want to inculcate the habit of saving a part of your monthly earnings in a planned manner while accumulating a good corpus over a period. These investments can be made weekly, monthly or quarterly as per your convenience.

An SIP can be a viable option for you if you do not want to invest a large amount at once. Various asset management companies offer SIP plans for as low as Rs. 100. This kind of investment method also offers flexibility in terms of tenure.

What is a lump sum investment?

Another way to invest in mutual funds is through lump sum investment. Such investments in mutual funds are beneficial if you have surplus cash that you would want to invest. Through this investment method, you get to invest all of your money at once, in a single transaction.

SIP vs Lump sum – The better method based on your investor profile

CHARACTERISTICSSIPLump sum
Investment frequencyPeriodicallyAt one go
FlexibilityHighLow
Impact of fluctuating marketLowHigh

When deciding on which method to opt for while investing in mutual funds, it is always better to have an overview of your finances – income and regular expenses – and the financial goals that you want to achieve. 

To create a robust investment plan, you could also seek expert advice. A professional could make it easy for you to park your savings in ways that could be beneficial for your goals, taking into consideration your appetite for risk.

Reach out to one today!