Understanding The Difference Between SIP and Mutual Funds

The popularity of mutual funds has soared in recent times. With benefits like professional management, risk diversification, and more, such funds present an easy way to invest in markets without taking too much risk. 

SIP, a popular term in the world of mutual funds, is simply a way of investing in these funds. However, people often wonder what are the key SIP and mutual fund differences.

What is a Mutual Fund?

Before understanding the difference between SIP and mutual fund, let’s quickly understand the two terms first.

A mutual fund (MF) is a type of investment that basically collects money or funds from multiple investors. This money is then invested in stocks, bonds and other instruments in varying measures. 

Here’s a quick overview of the key benefits and features of mutual funds —

• Managed by AMC (Asset Management Companies) 
• Diversification — investment in multiple instruments to spread the risk
• Good returns — usually higher than those of conservative sources like fixed deposits
• Balance of risk and rewards
• Funds managed by experts — ideal if you’re new to investing 
• Liquidity — mutual fund units are usually easy to buy and sell
• Diverse fund selection — you can choose from various types of mutual funds – 
  • Equity mutual funds
  • Debt mutual funds
  • Mutual funds based on market cap (large, mid, and small) and more 

What is an SIP?

While mutual funds are investment products, Systematic Investment Plans (SIPs) are simply one way to invest in mutual funds. So when you invest through SIP, you are practically investing in a mutual fund.

An SIP is a plan where you invest a defined amount of money in particular mutual fund(s) on a regular basis. This frequency can be monthly, weekly, or quarterly.  

With an SIP, you can develop financial discipline with regular investments and build long-term wealth for your future. 

Here’s what you can expect from an SIP — 

• Consistent and disciplined approach
• No stress of ‘timing the market’
• Cost averaging 
• Benefits of compounding 
• Low minimum investment threshold 

How is SIP Different from Mutual Funds?

Direct comparison in terms of SIP vs MF is not feasible. This is because one is an investment instrument while the other is simply a way of investing in the former.

With that said, let’s take a quick look at some general points regarding mutual funds and SIP differences —

1. Investment Mechanism

• SIP — Through regular and fixed payments
• Mutual Fund — Can be lump sum or SIP 

2. Flexibility and Discipline 

• SIP — Encourages financial discipline, whatever the market volatility be 
• Mutual Fund — More flexible approach to investing, as you can go through lump sum or SIP investments

3. Your Involvement 

• SIP — Does not require much management as the amount that you invest and the frequency are decided already
• Mutual Fund — Minimal via SIP route but more active involvement required for lump-sum investments (to time the market)

4. Risk Management

• SIP — Offers better risk management over time through cost averaging
• Mutual Fund — Balanced via SIP route, may vary as per your expertise in the lump sum mode

Frequently Asked Questions