Difference Between SIP and Mutual Fund

Introduction:

Rajat: Abhishek, I want to Invest my money. Please suggest some options for it.

Abhishek: Rajat, there are numerous ways to invest money, but the safest way to invest money is on mutual funds or SIP.

This is a conversation between two friends; one wants to invest money, and the other provides an option for him.

From ancient times we witnessed that investment is key to development. By keeping this in mind, someone rightly says we can achieve incredible progress with the proper investment. Economic advancement is one of the most precious gifts for humanity. It helps in the development of some other things too.

The economy and its related concepts are something that helps humanity in every possible way. With economic tools, people effectively perform their work and raise their standard of living. It helps people by offering numerous ways to invest and earn profits from it. By keeping the profits in mind, the government started several economic tools which support the nation's growth and development. Some tools are share markets, Mutual Funds, SIP, etc.

Why Investment?

The need for medium and small investments is increasing daily because the population's needs increase daily, and everyone wants to earn profits most safely. Now share markets offer several products for investment that people require to invest.

The most notable aspect of the share market is the starting of Medium and Small investments in mutual funds and SIP. Mutual funds and SIP are considered the biggest achievement in the economic field in less capital; they earn more profits. In today's time, everything is directly or indirectly related to the needs of people. Almost all fields currently design or develop their products by keeping consumers in mind.

Mutual funds are not only required for investment purposes but also offer jobs to a large chunk of the population; numerous companies are running which offer several types of Mutua funds.

Moto Behind Investment:

As we already know, investors always try to find better ways to invest, and the main purpose behind the investment is profit. There are numerous ways to invest in the Market; some of the most notable ones are Systematic Withdrawal Plans (SWP), Unit Linked Insurance Plans (ULIP), Equity Linked Saving Schemes (ELSS), and many others.

But, the safest and most prominent way of investment in Mutual Funds and SIP. According to some estimates, around 81 lakh investor accounts were added to mutual funds in 2020. And in SIP, a 91.8 billion net flow was registered in March 2021, per RBI data.

Investors always wanted to increase their returns without the hassle of tracking their portfolios and trading in the Market. Thus, many firms offer managers who trade in the Market on behalf of investors. And this saves investors time; also, it is less risky. Managers are professionals who have full knowledge of the Market and invest investors' money in profitable businesses; this helps maximize profit.

Both instruments, mutual funds, and SIP used to invest money in share markets. The share market is the basis for an investment as it provides the platform for people to invest their money legally. With the help of mutual funds and SIP, investors can earn huge profits because this is less risky compared to other trading options. Other trading options require time to monitor the share market continuously, but such is not required for mutual funds and SIP. Both instruments are different; let us find the difference between these two instruments of the share market.

What defines mutual funds as one of the most impactful investments in the share market? Let us discuss how. Firstly, we explain what mutual funds are and their characteristics.

What are Mutual Funds?

A mutual fund is a form of investment in which an authorized firm, such as a Bank or asset management company, collects and invests money from investors in the capital markets. Under mutual funds, companies or firms engage in the business of capital money and invest investors' money in low-risk securities. Generally, in mutual funds, investment is made in risk-free securities with higher profits. The motto behind investment in mutual funds is profit maximization without any risk.

Market movement creates risk for the securities traded in the capital markets. But the risk of moving the Market is reduced because investors invest in different assets with different investment portfolios. And if any investment suffers from the loss, or we can say any particular asset is not performing well, then the profit of other assets offset the loss assets. Under mutual funds, the investment can be made in different forms: shares, bonds, and commodities. And this all together is known as a portfolio for the investors. This investment portfolio is managed by a particular person who knows finance; they are known as a fund manager. It is considered one of the safest forms of investment because investment in mutual funds takes place in lump sum amounts. Different types of mutual funds try to achieve certain objectives, such as small-cap, mid-cap, and large-cap funds, index funds, etc.

What is SIP?

SIP stands for Systematic Investment Plan, which means investment is made systematically after analyzing all the investment-related aspects. The Systematic Investment Plan or SIP is similar to Mutual Funds in several manners. SIP is also the type of investment in which investors' money is invested in capital markets. The amount of money invested in SIP is less than in mutual funds.

SIP is a small investment in which money is constantly invested in the fund. Under this type of investment, a minimum of Rs 500 can be invested every month or quarter. Similar to mutual funds, a fund manager is responsible for investing investors' money in the safest portfolios. SIP is used to invest money in various market sectors such as shares, bonds, and commodities. Numerous firms involved in this business used the investor's money to invest in the safest pools. Banks are one of the firms that are engaged in the SIP business. The motive of the Fund Manager is to invest money so that investors' profits can be maximized simultaneously; risk can be minimized.

One of the major advantages of investing in SIP is the power of compounding, where the interest earned on the principal value is reinvested. Over a period, investors yield a higher return on profit.

Key Differences between Mutual Funds and SIP:

Both Mutual Funds and Systematic Investment Plan is a forms of investment in which investors' money is invested in the safest portfolios with low risk. Despite being similar to what differentiates them, let us find some major differences between these two investment forms.

1. Investment Value:

The most notable difference between Mutual Funds and Systematic Investment plans is the investment amount. Under Mutual Funds, the investment amount is in a lump sum, while in the SIP, the investment is made in smaller recurring amounts on a monthly or quarterly basis. Other capital market instruments are volatile. But Mutual Funds and SIP are less volatile; they offer less risk to their investors.

The main basis behind the low investment in both instruments is the nature of the capital market. Money invested in mutual funds is in a lump sum, but qualified professionals manage this amount. On behalf of investors, they invested customers' money in the safest portfolios. Similarly, SIP investment is made by trained professionals. Both are essential instruments of the capital market with low volatile nature and offer more profits.

2. Mode of Investment:

The investment mode is the second major difference between Mutual Funds and Systematic Investment Plans. Both are capital market instruments used to invest money in bonds, debentures, and, most importantly, securities. When investors invest their money in Systematic Investment Plan, they must make regular payments. In other words, the investors must invest money regularly, whether weekly or quarterly. While in Mutual Funds, there is a one-time investment.

Both instruments are volatile, but Systematic Investment Plan is less risky than mutual funds. The reason behind this is the mode of investment. Due to regular investment, the investors understand the Market properly in Systematic Investment Plan. Earning profit is the main motive behind this type of investment. So investors made investments after looking at all the factors properly.

3. Power of Compounding:

The motive behind the investment in capital markets securities is to earn profits and achieve their financial aim. But what differentiates between Mutual Funds and Systematic Investment Plans in compounding matters? The answer is clear; Mutual Funds require a large sum of money to invest, while in Systematic Investment Plan, the amount is less than in a mutual fund. In mutual funds, the investment is one time, while in Systematic Investment Plan, the investment is regular, and this period leads to compounds of the Systematic Investment Plan. Under Systematic Investment Plan, the investors accumulate wealth over time due to a regular investment plan. When regular investment is made for a considerable period, it automatically leads to greater wealth. So a Systematic Investment Plan is a better option for achieving the financial plan and investment goals.

On the other hand, Mutual Funds provide an option for the investors to reinvest the earnings or returns. And if investors reinvest their earnings on the same plan, they can also enjoy the benefits provided by the power of compounding. If they withdraw money from the Market, they lose some potential profits the capital markets offer.

4. Flexibility in the Market:

In the above paragraphs, we already discussed the investment value of Mutual Funds and Systematic Investment Plans. Mutual Funds require lump sum money to invest in it, while the Systematic Investment Plan requires a small amount. Investment value flexibility offered by Systematic Investment Plan is higher in it as compared to Mutual Funds. Under Systematic Investment Plan, the investors have the option to invest money in a small amount regularly.

They invest money either weekly, fortnightly, or monthly at the convenience of the investors. Because it doesn't require lots of money, it is easy to invest. Hence Systematic Investment Plan is a better option for salaried people and those who have a regular cash flow. So while investing in Systematic Investment Plan, the investors do not require to disturb their regular lifestyle or expenditure pattern. On the other hand, investment in mutual funds can only be made when the investors have the bulk of their money.

5. Lower Cost of Purchasing:

The other major difference between Systematic Investment Plan and Mutual Funds is the averaging cost. Systematic Investment Plans offer a high cost of averaging than Mutual Funds. It means investors can lower the overall purchase cost by buying more units when the Market is down and lesser units when it is up. So it is a calculative step to invest. And this helps the investors to reduce your average cost of purchasing. On the other hand, in Mutual Funds, the investment is in lump sum mode. So the investors end up purchasing all the units at a price that can be higher as you do not get the benefit of averaging.

6. Volatility:

The volatility offered by the Market also creates the difference between Mutual Funds and Systematic Investment Plans. When an investor is new, they often need clarification about the best time to invest in the Market. And if investors have to invest a lumpsum amount of money, then there is always the question of timing the purchase and thus exposure to high volatility periods. But in the Systematic Investment Plan, only some parts of investment face higher than usual market volatility.

Conclusion:

Both Mutual Funds and Systematic Investment Plan offers large numbers of advantages. They are considered the safest way to invest in capital markets with a low level of risk.