What Is the Difference Between Mutual Funds and SIPs?

Systematic Investment Plan (SIP) is a system of investing, whereas mutual funds are an investment class. SIP is such a common method of investing in mutual funds that people often get confused about the difference between sip and mutual fund. They think both these terms refer to the same thing. 

Understanding what is the difference between mutual fund and SIP is important for an individual who wants to invest in mutual funds. This blog provides a clear difference between mutual funds and SIP.

What are Mutual Funds? 

A mutual fund is an investment class where an asset management company collects or pools a sum of money from the investors and invests that sum professionally in various asset classes. A certain part of the fund is charged as a management fee each year. Mutual funds conduct thorough research and invest the money under professional guidance. 

All mutual fund schemes release their factsheet each month, which contains details of returns generated, securities held by the fund, etc. Investors can buy mutual fund units (or shares) online through broking platforms. 

Investing in mutual funds has its advantages such as: 

• Professional Management: Mutual funds are managed by professionals. The investments are made after conducting a thorough research. 
• Small Investment: Some mutual fund schemes allow investors to start with just Rs 100. 
• Transparency: Each month, mutual funds release their fact sheet that contains details of their holdings. 
• Regulatory Oversight: Mutual funds are regulated by the Securities and Exchange Board of India or SEBI. 

Mutual funds usually focus on a single asset class, or they can track an index. Mutual funds also come in various varieties, for example, a mutual fund can be based on a particular theme or sector. Based on their focus areas, mutual funds can be categorized into five types:

• Equity Mutual Funds
• Debt Mutual Fund
• Hybrid Funds (Mix of Debt and Equity)
• Index Funds
• ELSS Funds (Equity Linked Savings Schemes) 

What is SIP? 

A systematic investment plan (SIP) refers to a system of investing where a sum of money is invested periodically in a financial instrument. This is a method of building wealth over time. Usually, a small amount of money is invested each month for a number of years, which sums up to become a big pool of money over time. 

SIP investors get the benefit of compounding. In simple terms, compounding means that the gains made along with the initial capital in the first year are reinvested, and this cycle keeps going on. 

Example 

To understand SIPs from an example, let us assume a person starts investing Rs.5,000 a month in an FD bearing 7% interest. Considering that nothing changes, there is no tax, and the individual keeps investing for the next 20 years. 

Investing Rs. 5,000 a month at 7% rate of interest for 20 years turns out to be Rs. 26,19,826. You can also use the PowerUp SIP calculator to check how much your SIPs will be worth in the future. 

To put this in perspective, the individual invested Rs. 12,00,000 together in those twenty years, yet their total portfolio is worth over Rs. 26,19,826. This is the power of compounding. 

Key Difference Between Mutual Funds and SIPs 

Now let us see what is difference between SIP and mutual funds in details: 

Category	Mutual Funds	SIP
Definition	Asset class, or an investment where individuals invest	SIP is a method of investing
Investment Method	Can be lump sum or SIP	Regular investments at fixed time intervals
Flexibility	Can invest lump sum anytime	Usually done on a fixed date every month
Risk	Risk depends on the mutual fund category	SIP has comparatively lower risk
Market Timing	Requires the ability to time the market for buying low and selling high	SIPs average out costs over time, reducing timing risk
Charges	Higher charges (like – entry/exit loads, expense ratios)	No entry or exit loads for SIPs in most cases, and lower expense ratios overall
Affordability	Requires larger amounts of capital upfront for lump sum investments	Low starting amounts and flexibility to increase contributions over time
Volatility	Lump sum investments can experience higher short-term volatility	SIPs help mitigate volatility by spreading the investment over time

Investing in Mutual Funds Through SIPs 

SIP is a methodology that is commonly used to invest in mutual funds. Investors invest a fixed amount of money each month in mutual funds. This helps investors to get the benefits of compounding over time. However, SIPs in equity mutual funds usually have higher risk and reward as compared to SIPs in a fixed deposit or a bond.

However, mutual funds must be carefully selected before investing. Since most investors invest in equity mutual funds, these can be risky. Investors must conduct research before choosing the right mutual fund for SIP. 

Conclusion

The SIP and Mutual Funds difference is important to understand for a better understanding of your investments. SIP can be done in any asset class. Investors must be careful while choosing mutual funds for SIP. Investors should not chase higher returns but should invest in assets that give good risk-adjusted returns and must aim for investing for long periods of time to fully enjoy the benefits of compounding. Are you willing to start your investment and learning journey? Download the Powerup’s Financial Planning app today!