What is Difference Between Mutual Fund and Sip
Introduction:
Did you know more than 81 lakh investor accounts were added in 2020 for mutual funds, and almost 91.8 billion net flow of SIP was registered in March 2021 (according to RBI Data), making Mutual funds, and SIPs one of the most lucrative investment options.
While both mutual funds and SIP invest in the share market, there are a few differences between them. In this article, we will talk about mutual funds, SIP, and the main differences between the two. Read on to know more:
What Are Mutual Funds?
A mutual fund is an investment option that aggregates capital from different investors to form a substantial fund. Now this collected fund is then strategically invested in a wide range of financial instruments, like stocks, bonds, and others, with the main aim to create a diversified portfolio, which can help in wealth growth, and potentially decrease risk.
There are fund managers associated with these funds who use their expertise and market knowledge to make informed decisions. They make decisions about where the money can be allocated so that it can generate favorable returns for the investors. Mutual funds provide an opportunity to the investors to participate in a wide range of investments that might otherwise be inaccessible or too risky.
Advantages of Mutual Funds:
As mentioned above, mutual funds are really popular, and why not? They come with several advantages, such as:
Diversification: With mutual funds, investors can invest in a wide range of assets. This can help the investors reduce the risk of loss from a single bad investment.
Professional Management: As these funds are managed by professional fund managers, who use their expertise and market knowledge to make informed choices, and generate benefits.
Liquidity: Mutual funds can be easily bought and sold, offering better liquidity to the investors.
Affordability: As the investors can invest in mutual funds with relatively small smalls, as small as Rs 100, these are affordable options for the new investors.
Disadvantages of Mutual Funds:
Here are some of the disadvantages of mutual funds:
- Mutual funds come with different associated fees and charges
- Too much diversification of the portfolio can dilute returns
- Investors have no say in the fund investments
What is a Systemic Investment Plan (SIP)?
A Systemic Investment Plan (SIP) is an approach of investment in mutual funds, which offers regularity and discipline. In SIPs, investors contribute a predetermined amount of money at regular intervals, which is generally a month or a quarter.
This approach is beneficial for the investors who don’t want to make a lump sum investment or prefer to invest smaller sums over a period of time. Anyone, from different income levels, can invest in SIPs. Moreover, as SIPs harness the power of Rupee Cost Averaging (RCA), market volatility has minimum impact on them. Not to mention, SIP is less about choosing a specific investment, and is more about establishing a consistent investment habit.
Advantages of SIP:
SIP is known for its affordability, and ease. Further, here are some of the advantages of investing in SIP:
Discipline: SIPs build a disciplined approach to savings and investments, as the investor is making regular investments.
Rupee Cost Averaging: With SIPs, investors can average out the cost of investment over time, potentially reducing the risk of market volatility.
Flexibility: SIPs gives flexibility to investors of starting, stopping or modifying their SIP amount as per their comfort.
Low Initial Investment: As SIPs can be started with small amounts, it becomes easy for people with every income level to invest in them.
Disadvantages of SIP:
Here are some of the disadvantages of SIP:
- While SIP decreases the risk, the investment is still subject to market volatility.
- The entry and exit time in the market can affect the returns an investor can get
What is the difference Between SIP and Mutual Funds?
Now that you have a fair understanding of both mutual funds and systematic investment, let’s take a quick look at the key differences between these two:
Definition and Nature: While mutual fund is an investment option comprising a pool of funds collected from different investors, SIP is a method or strategy of investing in Mutual funds involving regular, disciplined investment.
Investment Approach: In Mutual funds, investors invest lump sum or one-time investment. Whereas, SIP requires regular, periodic investments in a chosen mutual fund.
Risk and Returns: The risk and return profile depends on the type of mutual funds, which are equity, debt, hybrid, etc. On the other hands, SIP offers the benefits of Rupee Cost Averaging, which can potentially reduce the risk associated with market timing.
Suitability: Mutual funds are suitable for investors who have a lump sum amount to invest and are looking for diversified exposure. However, SIPs are perfect for individuals who want to invest regularly and build a corpus over time.
Flexibility and Control: In mutual funds, investors have the flexibility to choose from various fund types, but limited control on where the funds are invested. Whereas, SIPs offer flexibility to change the amount and frequency of investments.
Conclusion:
While mutual funds are the investment vehicle, SIP (Systematic Investment Plan) is simply one of the ways to invest in them. SIP allows you to invest small amounts regularly, making mutual funds more accessible and manageable for every type of investor. Understanding this difference helps you make more informed financial decisions and choose the right investment strategy aligned with your goals.
At Mentor Wealth, we simplify this journey further. Whether you’re deciding between a lump sum or SIP, or selecting the best mutual funds to invest in India, our advisors guide you based on your risk profile, goals, and investment horizon. With us, you don’t just invest, you invest smartly and confidently.
Let’s grow your wealth, together
We’ve Spent 10+ Years Helping Clients
Like You Find Financial Confidence
Insights that empower your investments
Explore expert-written blogs on mutual funds, market trends,
and smart investment strategies
Let's build a wealthy Tomorrow
25+ years of experience helping investors find financial confidence