Difference Between SIP vs Mutual Funds
Mutual fund investments are preferred by many investors these days as it is a very easy way to enter the stock market. The returns from mutual funds are also comparatively higher than various other investment avenues. All investors’ money is pooled into the fund. Fund managers do all the necessary research about companies, their fundamentals, stock price movements and then cherry pick the stocks. You need not be worried or confused if you don’t have any experience in stock market investing because your money is invested in different assets by thorough professionals who are guided by research analysts. Since money is invested in various assets, risk reduces and hence the loss in one asset can be offset by profit in another asset. The fund managers pass on the returns generated from investments to investors.
We as investors may be busy with our lives and it may not be possible for us to track the stock market all the time. But markets are volatile and stock prices may change every moment. That is where fund managers come to our rescue. They constantly watch the markets and take the right decision about investments.
Mutual funds also help in saving tax. One has to put concrete efforts before choosing a mutual fund. The fund’s performance has to be tracked over a period of time to know its consistency. An investor should check if the fund’s objectives match his objectives in the first place. Fund’s popularity alone should not be the deciding factor. One can invest in mutual fund either through SIP or through lump sum mode. Let us read in detail about both the modes here.
Let us first learn why people should invest in SIP or lump sum and then analyse the differences between SIP vs. lump sum mutual fund.
What is SIP?
(Systematic Investment Plan) is a mutual fund tool that brings financial discipline as it is a simple way of investing on a regular basis. Even people who are afraid to invest in equity, get into the stock market by investing in mutual funds.
There are various types of mutual funds that can be chosen according to your goals and level of risk taking capacity. If you are a person afraid to take high risks, then you can invest in a mutual fund that invests majorly in debt funds and if you are a high risk taker, you can invest majorly in mutual fund that invests majorly in equities.
The SIP mode of investing is suitable even for small investors as the minimum amount required to invest in SIP is very low. One should have patience and stay invested for a longer time period to get risk adjusted returns. Several flexibilities are also offered to investors in terms of tenure, invested amount, etc.
Power of compounding:
For any other common man, SIP is the best route to achieve life goals as it will bring the habit of investing money and also low amount is enough. Due to the principle of power of compounding, one can get good returns from SIP. Also studies have proven that longer the time one holds an SIP, higher is the probability of getting good returns.
Rupee cost averaging:
It is a concept by which an investor benefits. You know well that the markets fluctuate but as SIPs are bought on the basis of NAV (Net Asset Value) and as this value keeps on changing, the average cost of an SIP unit gets reduced. Irrespective of market volatility, one can gain while investing in SIP investment.
When the markets are down, one can start buying more units of SIP. It is an opportunity in disguise. The main factor in case of SIP investment is one needs to have patience and not worry about market volatility.
The flexibility offered by SIP is huge as one can pause the SIP if he faces financial crunch and can resume it when he is financially stable. Also, one can increase the amount of SIP investment as he feels to do so. Markets may go up or down but one should not exit SIP. As an investor, one should have a fair idea about SIP vs. one time investment in mutual funds.
What is lump sum?
One should also know what lump sum mutual fund is. In case of SIP, you tend to invest certain amount weekly or monthly for a certain period of time whereas in case of lump sum, you invest the total amount in a single shot. This type of investment is suitable for an investor who has huge cash in hand due to retirement benefits or real estate gain, etc. Depending on one’s goals and time horizon, SIP or lump sum mode can be chosen.
Knowing what is difference between SIP and mutual fund is very essential. SIP is a mutual fund investment tool whereas mutual fund is a type of investment product. It’s always good to start investing early and continue it for a longer period to get good returns. Based on one’s requirement, SIP or lump sum mode can be selected as one size fits all does not work in case of investments.
Differences between SIP and Mutual Funds mode of investing:
|Feature||SIP||Lump sum Mutual Funds|
|Investment schedule||Regular||One time|
|Cost||Less due to rupee cost averaging||High as it is invested one time only|
|Volatility||Less impact||More impact|