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What is the difference between SIP and Mutual Fund?

What is the difference between SIP and Mutual Fund?

Investing means putting money to work to reach your financial goals. It’s buying assets – stocks, bonds, real estate or starting a business. Investing wisely is key – knowing the risks, seeing the returns and matching investments to your long-term financial goals. Read, research, know your risk and ask a pro to help you decide.

If you want to don’t put in the hours of work every day to manage your assets you can try mutual funds. In this blog, we have discussed mutual funds and the difference between SIP and Mutual Funds.

What are mutual funds and how do they work?

Mutual funds are those investment companies that collect money from many people and invest it in a bunch of securities – stocks, bonds, whatever. Professional fund managers decide on behalf of the investors.

The Role of Authorized Fund Houses

Authorized fund houses (banks or asset management companies) manage mutual funds. They create and run the mutual fund and choose what’s inside the fund.

Benefits of Diversification

One of the biggest benefits of mutual funds is diversification – spreading investments across assets to lower portfolio risk. When you invest in a mutual fund, you get exposure to many securities and any one of them not doing well won’t hurt as much. That diversification means more consistent returns over time.

Define SIP and what it’s for

Systematic Investment Plan (SIP) is investing in mutual funds where you invest a fixed amount every month, say. The purpose of SIP is to invest wisely and let compounding work over time.

How SIP is different from lump sum

SIP is different from lump sum where you invest a fixed amount regularly instead of a big amount together. That helps to average the cost and reduce market volatility.

What is better, a SIP or a mutual fund?

The key difference between SIP and mutual funds lies in their approach to investment, risk and return, investment amount, and how they are managed:

Investment Approach:

Mutual Funds: These are pools of money coming from numerous investors and then invested in various assets such as stocks, bonds or commodities.

SIP (Systematic Investment Plan): This is an investment method used in mutual funds whereby you invest a fixed amount of money at regular intervals.

Risk and Return:

Mutual Funds: The total risk of the fund will depend on the particular assets it has invested in. Mutual funds aim to maximize returns while managing risk through diversification.

SIP: SIPs do not alter the risk profile of a chosen mutual fund. However, SIPs’ regular investment strategy may benefit from rupee-cost averaging whereby the average cost of investment over time is reduced.

Investment Amount:

Mutual Funds: Allow for lump-sum investments. You can invest more money upfront.

SIP: Allows for smaller and more frequent contributions. SIPs are suitable for individuals who do not have large amounts of money to put into investments at once but want to make investments as time goes by continuously.

Fund Manager:

Mutual Funds: Have professional fund managers who make investment decisions on behalf of the fund’s investors.

SIP: On one hand, SIPs themselves aren’t directly managed; however there is still a fund manager overseeing pooled investments for the underlying mutual fund.

Difference between SIP and Mutual Fund: Is a mutual fund safe or SIP?

Neither mutual funds nor SIPs are safe investments. Both carry market risks, meaning your investment can go up or down.

SIP is a way of investing in mutual funds, not a separate investment product. While SIP can’t eliminate risk, it can be a safer way to invest in mutual funds because of rupee cost averaging and discipline.

What are the advantages of Mutual Funds:

  • Diversification Across Assets: Mutual funds pool your money with other investors and invest in different assets like stocks, bonds and commodities. This diversification helps to spread risk – if one asset class performs badly, others may offset the losses.
  • Professional Management: Mutual funds are managed by experienced fund managers who research, select and manage the underlying investments in the fund. This saves you time and effort in managing your portfolio.
  • Multiple Fund Options: Mutual funds come in various options to suit different risk profiles and investment goals. You can choose from aggressive small-cap funds, balanced hybrid funds or low-risk index funds as per your financial needs.

What are the advantages of SIP (Systematic Investment Plan)

  • Disciplined, Regular Investing: SIPs help you develop a habit of investing. You set up a fixed amount to be invested at regular intervals (monthly, quarterly etc.) This removes the emotional element from investing and helps you stay on track with your financial goals.
  • Power of Compounding: SIP allows you to benefit from the power of compounding. When you invest regularly, your returns are reinvested, earning returns on your returns over time. This can grow your investment corpus in the long run.
  • Rupee-Cost Averaging: SIP buys units of a mutual fund at regular intervals. This means you buy more units when the price is low and fewer units when the price is high. Over time this can average out the cost per unit, reducing the impact of market volatility.

Remembering the key points when considering the difference between SIP and Mutual Funds is important. Investing wisely is crucial, and understanding the risks associated with each option is essential.

Mutual funds might be the right choice if you’re looking for professional management and diversification. On the other hand, if you prefer disciplined, regular investing and want to benefit from the power of compounding, SIP could be the better option for you. Always remember to research, know your risk, and seek professional advice to make informed investment decisions.

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