What is The Difference Between SIP and Mutual Fund?

The pursuit of improved investment opportunities is constant among investors. Market alternatives range from hedge funds to Systematic Withdrawal Plans (SWP), unit-linked insurance plans (ULIP), equity-linked savings schemes (ELSS), and many others. 

Read: What is TREPS in Mutual Funds?

Read: How to Withdraw Mutual Funds Before The Locking Period

The most well-known, however, are Systematic Investment Plans (SIP), where about $91.8 billion in net SIP flows were recorded in March 2021, according to RBI statistics, and Mutual Funds. The statistics show that more than 81,000 investor accounts were added in 2020. 

Most investors are eager to increase their returns without worrying about handling their portfolios or trading in the market. In order to save investors time, several investment types now use fund managers to sell on their behalf.

What is a Mutual Fund?

As the name suggests, a mutual fund is a collection of assets put together by an asset management firm (AMC), where investors can acquire ownership of units in proportion to their investments. Equity funds, debt funds, hybrid funds, etc. are all options for the investor. Mutual Funds not only fulfill the investors’ specific financial objectives but also try to cover the risk.

Mutual funds are a type of investment where an authorized fund management company, bank, or asset management firm receives money from clients and trades in assets on their behalf with the goal of maximizing the profit ratio with the least amount of risk. Because the money is invested in a variety of assets over a range of time horizons, the risk of market volatility is diminished. 

A loss in one asset is balanced out by a gain in another item in the portfolio when the risk is minimized. A fund manager who has the knowledge to expertly manage the mutual fund portfolio, buy and sell shares based on market movements, and perform timely Research is provided by mutual fund managers, which is another significant benefit.

Investors who purchase ELSS mutual funds are benefited by tax relaxation. Section 80C of the Income Tax Act, of 1961, allows for a tax deduction for ELSS funds. In order to receive the tax benefit, your investment must not exceed Rs 150,000 in a given fiscal year.

When an investment is made in a lump sum, it is known as a mutual fund, which is among the safest options. Many mutual funds, including small-cap, mid-cap, and large-cap funds, index funds, etc., seek to accomplish specific goals.

What is SIP?

The abbreviation SIP stands for Systematic Investment Plan, which is a method of investment in mutual funds, whereas mutual funds are an investment product. A mutual fund SIP requires you to invest regularly over time and helps build a large amount to support a variety of financial objectives. As you can see, SIP is a component of mutual funds and is not distinct from them.

SIP encourages discipline in investment by requiring clients to make slow, regular contributions to a program of their choice. You can choose any frequency from daily, weekly, monthly, fortnightly, or yearly to make a huge amount. SIPs, or Systematic Investment Plans, are a type of mutual fund investment. A systematic investment plan, known as a SIP, is a kind of investment in a mutual fund. In a mutual fund using this strategy, investors make a series of tiny investments at regular intervals. 

Here, the main focus is on the long-term, methodical investment of financial resources. It neither functions as a thing nor as a way to invest. An investment technique known as a systematic investment plan (SIP) allows you to make small, recurring investments for the purpose of amassing sizable corpus funds. This is a systematic investment plan, which actually means excellent long-term investing strategies as well.

Difference Between SIP and Mutual Funds

Let’s break down the meaning of these terms in detail and determine the best course of action for an investor given his investment preferences in order to gain a better understanding of this financial jargon. There are many differences between the types of investments. The major differences are:

• Mutual Funds are an investment product that, in this context, allows investors to choose from a variety of mutual fund schemes in accordance with their financial objectives and capacity. While SIP is just a method of investment in these mutual fund schemes, SIP is not a product of investment.
• SIPs and Mutual Funds are frequently misunderstood. The majority of people don’t know what SIPs and Mutual funds are. Mutual Funds are simply where you invest. While SIP is a sort of investment in Mutual funds,
• An investor is free to decide whether to make a one-time, lump-sum investment in Mutual Funds or whether he wants to make a series of smaller, ongoing investments through a SIP.
• You should have a huge amount to invest in a mutual fund, as it needs a lump sum to create your portfolio and increase your financial benefits. But selecting a SIP among the available mutual fund options is something for which you have long-term financial goals. SIP is a disciplined approach that makes a successful investment possible. You are required to continue depositing a defined sum at predetermined intervals for a fixed period. This keeps you committed to the investment.
• , A mutual fund investor might decide whether he should keep his investment or receive a return. It all depends on his investment goals. Investors who reinvest in the same plan after experiencing a loss stand to gain from compound interest. The SIP approach allows investors to regularly make disciplined investments in order to build wealth over time. Utilising a systematic investment plan (SIP) is among the most efficient strategies to achieve your financial objectives.
• The up-and-down trend in the market plays an important role in investment.
• Market trends sometimes become bullish and sometimes bearish. They continuously shift from up to down or down to up. Because there is a higher investment value in mutual funds in comparison to SIP, the constantly changing market trends have a greater impact on mutual funds than on SIP.
• Due to a mutual fund’s higher investment value than a SIP, the AMC (Annual Maintenance Charge) and other fees, such as transaction costs, are higher in mutual funds. In mutual funds, the fees paid to the fund manager and the transaction value are on the higher side, whereas in SIPs, the investment value and the trade value are always on the lower side.

Conclusion

Generally speaking, one of the finest investment options is mutual funds. These are run by expert professionals who periodically assess and comprehend industry developments and take appropriate action. It takes place on a vast scale and is economical. Therefore, it carries little risk and could yield more profits. The major reasons why most individuals invest in various types of mutual funds are their investment diversification and, of course, their lower risk. While investing in SIPs is a bit different from investing in Mutual funds, SIPs are a systematic, consistent type of investment. In this type of investment, the investor needs to invest a small amount but on a weekly, monthly, or yearly basis.