What is the Difference between SIP and Mutual Fund: Best Ways to Invest through a SIP in India

what is the difference between SIP and mutual fund
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What is the difference between SIP and Mutual Fund?

The biggest misconception that prevails in the minds of investors is that SIP is an additional investment option besides mutual funds. A mutual fund here is an investment product that enables investors to select through a wide range of mutual fund schemes as per their investment goals and ability. While SIP here is not an investment product but a mere convenient method to invest in these mutual fund schemes. 

An investor may choose to invest in one go i.e. in a lump sum or by making interval payments i.e. through SIP at his own discretion. To have a better purview of this investment jargon, let us dive through the nuts and bolts of what they mean and what shall be a better choice to go about for an investor based on his investment choices.

Meaning of a SIP and A Mutual Fund

SIP and Mutual Funds may sound similar, but they are not entirely the same. Most investors tend to get perplexed by these high-end terminologies. Simply put SIP is a part of the wider concept of mutual funds. 

A mutual fund is said to be a pool of assets created by an asset management company (AMC). Here an investor avails ownership of units. This is done in proportionate to their investment. The investor here has free will to select the desired investment scheme. An investor generally decides this on the basis of his risk-bearing capacity and financial goals. 

A systematic Investment Plan (SIP) however, is an investment strategy where an investor can choose to systematically invest over a period of time. He may create a corpus to meet his investment vision. SIP is therefore not different from mutual funds, but an essential part of it.

SIP helps to bring about a discipline in making investments in mutual funds. This is done as through a SIP the investor deposits a regular fixed amount in the desired scheme over a period of time. The investor here has the flexibility to choose the frequency of investments which can vary daily, weekly, monthly, or yearly. Usually, the said pattern is followed diligently. Usually, inventors choose an auto-debit facility to maintain the efficiency of the investment while opting for SIP. Therefore it inculcates the idea of regular investment in the mind of investors.

Let us now understand the varied difference related to a lump-sum mutual fund and a SIP 

Difference between Lump-sum payment and SIP

ParametersSIPLump-sum Mutual Funds
Investment wayRegular intervalsOne-time investment
CostLess due to rupee cost averagingHigh as the investment is made in a single transaction 
FlexibilityHighly flexibleLower flexibility
VolatilityLower impactHigher impact

Reasons to Invest through SIP in India

  • Rupee Cost Averaging- When an investor has invested through SIP, he can easily manage to stand the upheavals of the market. This is because the investments in this method are made at different levels at different periods. So at times, when the market is rising, the valuation of the portfolio shall increase, thus working in the favor of the investor. And at times when the market is falling, the investors shall be allotted a higher number of units as per the NAV. Thus providing an investor with the advantages of both worlds. This is known to be the benefit of Rupee Cost Averaging for an investor. Take for instance, if an investor X has invested Rs. 10,000 as his first SIP  at around Rs. 10 per unit, this makes the next investment at NAV at around Rs. 8.50 per unit. Now the cost of investment for the allotted units under these two SIPs shall average out to Rs. 9.25 per unit. Hence a cost cut to the investor. 
  • Disciplined way of investing: The NACH Mandate that has been authorized by the investor's bank, while the investor has registered for a SIP in a mutual fund, automatically deducts the settled amount as per the investment plan from the investor's bank account. This is then invested in the selected mutual fund scheme without much hassle. Now, this system of SIP investing has a sense of inculcating a much-needed financial discipline into an investor's life. 

These investments are continued irrespective the market experiences an up or a  down. Now with regular savings, the potential investments may in sequence accumulate the savings and help the investor to move towards his financial commitments effortlessly.

  • Eliminating investing biases: Investment decisions are often found to be clouded by multiple investment biases. This may include emotional bias and timing bias. The market swings impact investment decisions through fear and greed psychosis. At times when markets are volatile, it is advisable to not pull out the money from the market and as SIP plays an effective role in catering to the market volatility and investors can freely continue to make their investments. Also, it is further advised that an investor must keep in mind to invest during the falling markets to attain the advantages of lower valuations. 

Similarly, it has been that there is a vague idea about the right time to invest in the markets. This in return leads to procrastination which is another primary reason for the investors to have delayed their financial plans. SIP has a terrific system to eliminate the investors' emotional and timing bias. This is because the amounts are continued to be invested across all market fluctuations. Now instead of waiting for the so-called right time in the markets, the  investor can easily focus their energy and 'time in the markets.'

  • Staggering the investments over a period: Another significant positive that SIP brings in with itself is that it allows the investors to make their convenient investments. If one somehow wishes to invest in their financial attainment in a lump sum method, the entire amount needs to be put upfront. This however shall not be possible as the investors may not be able to accumulate the required investment corpus towards their financial goals with their planned regular savings. This may lead to disappointment and disinterest. Now when an investor looks at the opinions of SIP, it enables him/her to stagger the investments through a period and thus taking mini steps towards their investment journey. Hence a suitable idea for investors with regular income and limited scope of investments. 

Best Investments Options through SIP in India

Below are some of the top-performing mutual funds to invest in through SIP in India as per the reports.

Fund NameCategory
Canara Rob Bluechip Equity Fund-Reg(G)Large Cap Fund
Canara Rob Emerg Equites Fund-Reg(G)Large & Mid Cap
IIFL Focused Equity Fund-Reg(G)Focused Fund
Nippon India Value Fund(G)Value Fund
Parag Parikh Flexi Cap Fund-Reg(G)Flexi Cap Fund
Mirae Asset Tax Saver FundTax Saving
DSP Tax Saver Fund-Reg(G)Tax Saving

Disclaimer: The securities quoted are exemplary and not recommendatory. Past performance is not indicative of future returns
 

While it is by now understood that SIPs offer flexibility and lower cost thanks to averaging. It offers an efficient way to manage the volatility and thus is a highly smart way to invest especially for investors who are new to the business and are in the process of understanding the market. However one must make the choice by carefully understanding the risk and return of both methods and not fall into a trap of ignorance in the race of cutting down the risk and wanting to earn higher returns. This chase may result in no good. 

Important things to remember:

1. Do Not Blindly Follow Hot Tips

No matter how credible the source is, never follow a stock marketing tip blindly without conducting thorough research personally. Always select the stocks after doing proper research and analysis on the performance as well as the companies. While some tips can work out to give you huge benefits, the wrong ones can push you down under the risk pretty quickly. 

2. Eliminate Loser Stocks from Portfolio 

There is absolutely no guarantee that a stock will rise after a great fall. Know that it is extremely important to be practical about what is possible and what's impossible in the stock market. So, upon realizing that a stock is performing poorly in your portfolio, accept your mistake and sell it immediately to prevent further losses. 

3. Don't Exceed Your Investment Budget Abruptly 

While it's true that long-term investments are way better than other forms of investment, you shouldn't exceed your investment budget in a haste. Instead, decide on a fixed amount and invest it across various good stocks. Rather than investing in only one stock, divide your budget evenly across multiple good-performing stocks and shares. 

Disclaimer: The securities quoted are exemplary and not recommendatory. Past performance is not indicative of future returns

  • Which is more profitable, SIP or mutual fund?

  • Is an SIP investment tax-free?

  • Is it possible to lose money through SIP?

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