SIP vs Mutual Fund

Today, every investor is seeking a better investment option. Let’s compare SIP vs mutual funds, which is better for beginners. There are a variety of options available in the market, including Systematic withdrawal plans, Hedge funds, Unit Linked Insurance plans, and many more. But nowadays, the leading investment options are SIP vs mutual funds returns for long-term investment, with 90 lakh investors opening accounts in 2020. As per RBI data, the net SIP flow was 91.8 billion in 2021.

Investors who lack knowledge of the stock market or want to increase their returns without monitoring their portfolio and trading in the market. On behalf of investors, a fund manager is hired to track the portfolio’s performance and make investment decisions for SIP vs mutual funds for wealth creation in India. Therefore, a professional fund manager’s knowledge and judgement will be beneficial in yielding high returns. Many investors today are comparing SIP Vs mutual funds for wealth creation in India to achieve financial objectives.

In this article, you will get to know about SIP vs mutual funds comparison and the difference between them.

What is SIP?

A systematic investment plan is a method of investing in mutual funds. SIP enables you to invest a fixed amount of money for a specific time frame. A SIP is related to a mutual fund, but the investment is made in a lump sum, whereas a SIP involves investing a fixed amount regularly.

With SIP, you can start investing with a small amount of money and have it grow over time.

Investing in SIP is an ideal option for investors who want to create long-term wealth.

What is a Mutual Fund?

A mutual fund is a pool of money collected from several investors to invest in a diversified portfolio of stocks, bonds and other securities. On behalf of investors, a fund manager is appointed to manage and track a portfolio of funds and to make investment decisions in line with the fund’s objectives. Mutual funds offer investors the chance to manage their portfolios professionally with a small amount of money.

Difference between SIP vs mutual funds

Let’s understand the difference between SIP vs mutual funds, which is better for beginners based on investment method, Risk management, returns and affordability.

What are the advantages of investing in mutual funds?

• Diversification 

A Mutual Fund helps diversify a portfolio by investing in different types of securities. This allows investors to help minimise risk by investing in a variety of securities. This helps protect investors’ baskets from market sentiment.

• Professional Management

Professional fund managers manage mutual funds. They manage investments for a large number of investors with the same objective. The fund manager aims to make better investment decisions and help investors grow their wealth and achieve steady returns.

• Transparency

Mutual Funds offer safety and transparency in their investment as the Securities and Exchange Board of India highly regulates them. It provides a reliable platform for maintaining and tracking your investment performance. 

• Low initial investment

Mutual funds are considered an affordable investment option for investors who can start with a small amount. It offers 1000+ mutual fund schemes to invest in, starting at ₹100.

• liquidity

Mutual funds are highly liquid investments. It allows investors to buy and sell their units at any time. It is considered an ideal investment option for short-term investors due to its ease of entry and exit. 

• Tax Benefits

Mutual funds offer tax benefits to investors through ELSS funds, which offer up to a ₹1.5 lakh deduction under section 80C, but such funds have a 3-year lock-in period.

What are the benifits of investing in SIP?

SIP is a good investment option for anyone looking to invest a small amount for financial security. Here are the advantages of SIP:

• Start with a small amount.

Investment in SIP can be made from ₹100 to ₹1000, depending on the individual’s budget. It is like a regular savings a portion of your income for financial security. Small steps lead to achieving high milestones.

• Compounding Effect 

The compounding effect means the investment you make in a SIP not only grows over the long run but also grows on the returns it generates. This is known as compounding, which means earning interest on interest.

• Flexblity

SIP offers flexible investment options, as money invested can be withdrawn at any time; there is no specific time frame.  

• Market volatility

A fluctuating market is always stressful in investing, as it requires deciding when to enter and when to exit. But with SIPs, you can invest monthly or quarterly without considering market volatility conditions.

• Financial security  

SIP investment helps in creating a substantial financial cushion for the long term. A regular monthly investment helps fulfil financial goals and create a steady wealth for the future.

Factors to consider when investing in SIP vs Mutual funds

Here are some factors to consider when comparing SIPs vs. mutual funds and determining which is better for beginners, depending on their investment needs.

• Investment time frame

The investment duration, or the time period an investor is willing to stay invested, is essential to deciding between SIPs and mutual funds. SIPs are chosen to meet long-term goals through systematic, regular basic investment. At the same time, mutual funds fulfil both short-term and long-term financial goals of an individual.

• Cost of investment 

Comparing the investment costs of SIPs and mutual funds is crucial before investing. SIP enables investors to start with a small amount on a monthly and quarterly basis, making it cost-efficient for investors with limited funds. On the other hand, mutual funds require a high initial investment, which may affect the affordability of some investors.

• Risk capacity

A risk factor is significant when choosing between SIP Vs mutual funds. SIP with their systematic investment offer a strategy to avoid risk. Mutual funds and their various types 

Involves varying levels of risk. So, investing in SIPs and mutual funds is a must; one should have a risk appetite aligned with their chosen investment option.

• Prior performance

Before deciding between SIP vs mutual funds, it is essential to examine their past performance to make an informed decision. Past performance helps investors compare SIP vs. mutual fund returns to ensure consistent performance. When it comes to SIP vs mutual funds for wealth creation in India, consistency and market sentiments play a vital role. 

• Track record for the fund house

Clearly evaluating the historical performance, credibility, and transparency of the fund house that provides SIPs and mutual funds is crucial. A reputable fund house must adhere to ethical practices and employ professional fund managers who provide consistent, reliable, and trustworthy services to investors. 

How to start investing in SIP vs Mutual funds?

Here are the steps involved in investing in SIP and mutual funds

1. Set your Financial goals. 

• Before investing in a mutual fund or SIP, it is crucial to set short-term and long-term objectives, such as education, retirement, and long-term wealth creation.
• Decide on the time frame to choose a suitable investment option.

2. Assess the risk capacity.

• Figure out how risk you can afford to take
• Select between equity, debt or hybrid investment based on your level of market judgement.

3.  Research and select funds

• Distinguish funds based on the prior performance, experience of the fund manager and expense ratio

4. Complete KYC

• Submit all documents required for the mandatory know-your-customer process. 
• Documents required are address proof and identity proof.

5. Open an investment account

• Choose a trusted investment platform
• Link your bank account for transactions

6. Initiate your SIP or lump sum investment.

• For SIPs, set up an auto payment for monthly investments
• Choose the SIP amount and tenure

7. Track your investment performance. 

• Periodically track your fund performance to ensure it meets your standard goal.
• Make changes in the investment performance based on market situations

SIP vs mutual funds for wealth creation in India: Which is better?

SIP and Mutual funds are similar, as Mutual funds have two investment modes: SIP and lump sum. SIP is a method of investing in mutual funds that offers benefits such as consistent savings and a reduced impact of market fluctuations. Which is better depends on the financial objective.

SIP is a preferable option when investing a smaller amount of money regularly, making it suitable for individuals with a stable income. This method is best suited for long-term financial goals like retirement planning and education.

A lump-sum investment in mutual funds is suitable for individuals with a large amount of money. This method is highly suitable for achieving medium to short-term goals or when the market seems favourable.

Choosing between SIP and a lump-sum investment depends heavily on your steady income, risk tolerance, and financial objectives.

Conclusion

SIP and mutual funds offer different benefits depending on investment style. A mutual fund is a product and a SIP mode of investment. If you want to invest consistently and reliably, a long-term SIP is the better option. Overall, SIP vs. mutual funds for wealth creation in India is highly dependent on the investment time frame, financial planning and goals, and market understanding. 

FAQs

Is mutual funds the same as SIP?

Ans. No, a mutual fund is a financial instrument that pools money from investors, while SIP is a method of investing in a mutual fund regularly through fixed contributions.

Which is better for the long term: SIP or mutual funds?

Ans. For long-term wealth creation, SIP is a popular choice because it offers consistent investing and the power of compounding.

Can SIP go in loss?

Ans. It is possible to not earn money well in a SIP, or even lose money, if the market performs poorly and the underlying assets lose value. However, profits generated from the SIP can recover in the market, so the SIP is subject to changes and can incur losses, like any other market-linked investment option.   

What happens to SIP if the market crashes?

Ans. When markets crash, most investors panic and stop their SIPs. But continuing your SIP during market downturns is usually the more brilliant move. Falling markets let you buy more units at lower prices through rupee cost averaging. Over time, this reduces your average costs and boosts returns when recovery happens. 

What are the factors that are considered when investing in the SIP vs. mutual Funds?

Ans. Here are some factors to consider when comparing SIP vs. mutual funds, and which is better for beginners, depending on their investment needs, such as investment time frame, investment cost, risk capacity, prior performance, and the fund house’s track record. Comparing the investment costs of SIPs and mutual funds is crucial before investing. SIP enables investors to start with a small amount on a monthly and quarterly basis, making it cost-efficient for investors with limited funds.

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