Difference Between SIP And Mutual Fund: SIP vs Mutual Fund

by Tanisha Chabra
23 May 20244 min read
Difference Between SIP And Mutual Fund: SIP vs Mutual FundDifference Between SIP And Mutual Fund: SIP vs Mutual Fund
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Our lives now involve a great deal of online learning and investing. This can oftentimes be confusing as most of the terms used may sound like technical jargon. Terms like ‘SIP’ and ‘Mutual Funds’ often can confuse novice investors. This has led to people pondering on questions like “mutual fund vs sip, which is better.” In this article, we will take a closer look at what the two terms mean and the difference between SIP and mutual fund. Keep reading to find out!

What is a Mutual Fund?

A mutual fund is an investment vehicle that pools money from many investors to invest it in various investment securities such as company stocks, bonds, commodities, etc. These mutual funds are managed by a fund manager who is experienced in managing stock market investments.  

Mutual funds have become popular investments as they provide professional management and reduced risk by diversifying the investments across various financial assets, industries, etc. These investments are driven by the goals of the fund which are set beforehand. 

Mutual funds may be set up for retirement planning, to serve as tax-saving vehicles or even track an index. 

Also Read: How Mutual Funds Work in India

What is a Systematic Investment Plan?

SIP stands for a Systematic Investment Plan and is a disciplined approach to investing in mutual funds. An SIP allows you to invest a fixed amount of money into a mutual fund scheme at regular intervals, such as monthly, yearly, etc. This makes investing convenient for investors while ensuring that they remain disciplined.

An SIP allows investors to consistently invest small chunks into mutual funds which over time turn into sizeable investments thanks to the compounding effect of instruments in the stock market. This also allows investors to average out their investments by maintaining consistency and discipline through market highs and lows which effectively beats volatility. 

What is the Difference Between SIP and Mutual Funds?

Now that you have understood what mutual funds and SIPs are, let’s look closely at some of their most important differences.  

1. Concept

Understanding the difference between SIP and mutual fund is crucial for effective investing. While mutual funds are investment vehicles that pool money from many investors to further invest in the financial markets, SIP is a method to regularly invest a fixed amount into mutual funds.
A mutual fund here is the investment and SIP here is the approach that helps you invest consistently into them.   

2. Investment Strategies 

In the case of mutual funds, the overall investment strategy is outlined beforehand in its prospectus. This will include the goals of the mutual fund and the investments the fund can make. The funds’ strategic investment decisions to buy or sell investments are taken by the fund manager. 

On the other hand, an SIP can form part of your personal investment strategy to invest in mutual funds in a disciplined manner. This allows you to invest consistently without worrying about the market conditions. 

3. Investment Cost 

Investment costs also play an important role in SIP and mutual funds investment. Mutual funds generally charge two types of expenses i.e. transaction costs and costs that form part of its expense ratio. The expense ratio is charged to make up for the fund managers fees and other investment management services provided by the Asset Management Company (AMC) running the mutual fund. 

As an SIP is an approach to investing it inherently does not have charges of its own. However, one may still face charges that are put into place by the mutual fund like transaction costs. This is because SIPs would involve making regular investments and these investment transactions would come with transaction costs that the mutual funds levy. 

Wrapping Up 

Understanding the difference between SIP and mutual funds helps investors understand the difference between an investment and an approach to investing. This allows investors to get a better understanding of how the investment world works which will then help them plan their financial future better. People need to consider their budget, financial goals, investment duration, and other factors to choose the best option among mutual funds and SIPs.

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