Mutual Funds v/s SIP

SIP stands for Systematic Investment Planning. It allows you to invest systematically i.e. weekly, monthly or quarterly based on your preference. Now you must have been thinking – where to invest?

With the help of SIPs, you are investing in mutual funds.

In other words, SIP is a tool by which you can invest in mutual funds.

SIP is a method of mutual fund investment and not a type or comparable investment instrument.

The other tool for investing in a mutual fund is a lump sum amount or one-time investment.

SIP is a very smart and hassle-free way to invest in mutual funds. Unfortunately, many investors, especially new ones, think SIP is an investment by itself, while it actually is a way to invest in mutual funds.

Let us discuss it in detail.

WHAT IS THE DIFFERENCE BETWEEN MUTUAL FUNDS AND SIPs?

A mutual fund is a financial instrument, which pools your and other investor’s money in stock market if you opt for an equity mutual fund.

If you opt for a debt mutual fund, and the money is invested in treasury bills, Government Securities, Corporate Bonds and Money Market instruments. Your money is invested in a mix of stocks and bonds if you choose a hybrid fund.

So, if you do not wish to invest in the market directly or you do not want to take a high risk but want to invest in the market with low risk, then mutual funds offer you great schemes based on your needs and objectives.

To invest in these mutual funds, there are two methods you can choose from. First through a lump sum and second through Systematic Investing Plan (SIP).

A lump sum is a single large investment done by an investor in one go. A debt mutual fund is generally preferred for this kind of investment.

Whereas, an SIP is an option of investing a fixed sum in a mutual fund scheme on a regular basis i.e. predefined regular interval. It is similar to regular saving schemes like a recurring deposit.

It is a tested method of minimizing risk and yet enjoying good returns, by regular, periodic investment, over a long period of time.

SIP is the ideal method to invest in the equity market as it involves staggering your investments over the whole financial year. It will help you to average the cost of purchase and beat volatility.

Also, it brings financial discipline to your life.

Hope you understand by now that an SIP is not a different type of investment. It is just another way of saying ‘monthly investment’.

There are several benefits of investing in Mutual Fund via SIPs i.e. a fixed amount every month:

I.Easier to save and invest: It is easier to save small amounts of money regularly than a big amount in one go. And create wealth using small investment.

II.Stock markets are volatile: Some months they are high and some months they are low. So investing each month averages out the purchase price.

III.Discipline: Saving and investing every month instills discipline in the investor to stick to a plan in spite of market ups and downs.

IV.Fewer decisions: You don’t have to decide every month how much to invest and which funds to invest in.

Because of these benefits sometimes the popular media talks of SIPs as if they are an investment class of their own. But they are just another name for monthly installments in mutual funds.