Difference Between Mutual Fund and SIP

Difference Between Mutual Fund and SIP

8 mins read463 Views Comment
Jaya Sharma
Assistant Manager - Content
Updated on Feb 7, 2024 14:50 IST

Mutual fund and SIP are both methods of investment. Those who want to compound their money in a secure manner can consider these two options. These two serve a similar purpose but have different approaches towards investment. This article will teach you about the difference between a mutual fund and SIP. 

difference between mutual funds and SIP


Table of Content 

The Difference Between Mutual Fund and SIP

SIP is a method of investment in mutual funds. It cannot be compared. You can still compare the lump sum investment and SIP.

Parameters SIP Lump-sum 
Investment Time  Regular  One time
Flexibility High as you can invest as per your convenience. Low as you have to invest the entire fund.
Cost Less because of rupee cost averaging. High as you are purchasing it at the same price, so rupees cost averaging does not take place.
Volatility Less as the purchase period is in parts, thus allowing you to purchase in both high and low-volatile markets.  High since you may end up purchasing in a highly volatile period.
Risk More risk since the entire funds are invested in a single go. Lesser risk since you do not invest the entire amount in one go.

What is a Mutual Fund?

A mutual fund is a pool of assets created by a team of experts. These experts are available to you through asset management companies. In these companies, investors can gain ownership of units proportional to the investment. They can choose to invest in equity, bonds, debt, and hybrid funds. Investors can choose the asset as per their risk-bearing capacity and financial goals. The risk management process can be especially beneficial for this.

Explore risk management courses

Professional money managers operate mutual funds. They allocate funds to different assets to gain the maximum positive return on investment. A mutual fund portfolio is structured and maintained to match the objective of the investment. Individual or small-scale investors can access professionally managed portfolios. These may include equities, bonds and other securities

Each shareholder will have an equal hold on the gains and losses of the fund. The performance of a mutual fund is tracked in terms of the change in the total market cap of the fund. The value of mutual funds depends on the performance of securities within them. Having a share in a mutual fund represents an investment in multiple funds. Due to this fact, mutual fund price is also known as net asset value. To derive the net asset value of a fund, you will divide the total value of all securities in the portfolio by the total number of outstanding shares. 

Explore investing courses

Benefits of Mutual Funds

  1. Risk minimization: Mutual funds are great for diversifying investment portfolios, which happens with investments across varied assets. Diversification minimizes the risk of investment failure that may occur in the case of investment in a single asset. In mutual funds, the risk from a single asset is countered due to investment in multiple assets. Investors have a lesser risk of losing their funds.
  2. Expert management: Fund managers are the experts who professionally manage mutual fund portfolios, conduct thorough research and buy-sell shares based on the market movement. 
  3. Tax advantage: Investors who invest in the ELSS mutual funds enjoy tax advantages. ELSS funds qualify for the tax deduction under Section 80C of the Income Tax Act, 1961. To avail tax benefits you can invest up to ₹ 150,000 annually to avail of the tax benefit.

Tax Planning Meaning, Objectives and Methods
Tax Planning Meaning, Objectives and Methods
Tax planning is a crucial financial strategy involving the analysis and arrangement of one's financial affairs. The goal is to minimize tax liability within the legal framework. This process includes...read more

Learn more about mutual funds

Earning Through Mutual Funds

There are three main ways of earning from mutual funds:

  • You earn income through stock dividends and interest on bonds in the fund’s portfolio. 
  • A mutual fund pays almost the entire annual income to fund owners as distribution. Investors can either receive a cheque for distributions or reinvest the earnings and get shares.
  • If the fund sells those securities that have increased in price, it has a capital gain. Most funds pass these gains to investors in a distribution.
  • If the prices of fund holdings increase, but fund managers do not sell them, then the fund’s shares increase in price. Investors can sell mutual fund shares for profit in the market.

What is an SIP?

SIP is an abbreviation for a systematic investment plan. It is a method for investing in mutual funds. SIPs are beneficial when you are short on lump sum money or do not want to invest all your savings. Lump-sum investment may not be the best way out there since markets fluctuate frequently. In SIPs, you do not have to invest a lump sum. Instead, you can systematically invest over a period of time. The amount and time for investing in SIPs depend on your capabilities. The timeline may vary from weeks to months and quarters. Whenever you invest in a mutual fund through an SIP, you buy a specific number of fund units. This number corresponds to the amount that you have invested. There is no need to time markets while investing through a SIP since you will benefit from bullish and bearish market trends.

How to invest in SIP?

if you plan to invest in SIP, you should invest 50% of your money over a period of time. You should follow several steps to start investing in SIP:

  1. Understanding risk appetite and investment objective: First, you must understand how much loss you can bear. This will depend on factors such as your age, financial obligations and savings. Remember if your investment objective is higher returns, you should invest more funds.
  2. Choosing an SIP mutual fund: When choosing an SIP, consider your risk profile and financial goals.
  3. Completing the formalities: Fill up the application form. After that, you must fill up the ECS form if you are starting an SIP online. If you want to opt for offline mode, you can submit the cheque for the monthly SIP amount. Submit a cancelled cheque and fill up the KYC form.
  4. Decide the SIP schedule: You need to decide on a schedule to pay the instalments for the SIP. You can choose if you want to make monthly or quarterly payments.

Benefits of Investing in SIPs

Systematic Investment Plans (SIPs) are a way to invest money in mutual funds, and they come with the following benefits.

Small Start: You can begin with a little amount of money, sometimes as low as a few hundred rupees. It's like saving part of your allowance or pocket money regularly.

  • Discipline: It helps you make saving a habit. Just like you might set aside time for homework or playing a sport regularly, SIPs make you invest money regularly.
  • Less Stress About Timing: You don't need to worry about the best time to invest. Whether the stock market is up or down, you keep investing, which can actually work out better in the long run.
  • Benefit From Averaging: When the market is down, your regular investment buys more units of the mutual fund, and when it's high, you buy fewer. Over time, this can average out the cost of your investment.
  • Power of Compounding: Think of it as a snowball effect; the money you invest grows over time because you earn returns not only on the initial investment but also on the returns that investment has already made. The earlier you start, the bigger the snowball gets.
  • Flexibility: You can start or stop your SIP anytime without any penalty, and you can also change the amount you invest.
  • No lump-sum requirement: Once you start investing in SIP, you do not have to invest the entire fund in a single go. This gives you an advantage in assessing the ROI on that particular mutual fund. Once you start investing in SIPs regularly, you start learning financial discipline. 
  • Goal-Oriented: Helps you save for your goals, like buying a bike, going on a trip, or even your college education, by estimating how much you need to save regularly to reach your goal.

Explore stock market courses


What happens if I don't have enough money for my SIP one month?

It's okay if you miss one because there's not enough money in your account. There's usually no penalty, but try to keep it regular for the best results.

How do I pick the best SIP?

Look for one that fits what you're saving for, how much risk you're okay with, and how long you plan to save. It's like choosing a game strategy; what works best depends on the goal and the rules you're playing by.

Can I stop putting money into a SIP whenever I want?

Yes, you can stop your SIP anytime. Just tell the company or use the app you set it up with to stop the payments.

Who decides what to buy with the money in a mutual fund?

A professional, kind of like a coach, makes those decisions. They pick the investments they think will do the best.

What types of mutual funds are there?

There are many types, like teams for different sports. Some invest in companies (equity), some in loans or bonds (debt), and others in safe places to keep money (money market). Each type has a different goal and level of risk.

Why would I put my money in mutual funds?

Mutual funds can be a smart way to invest because you get a mix of different things, which can be safer than just one. Plus, you have a coach (fund manager) making decisions, and you can usually take your money out if you need to.

Are mutual funds safe?

Like any game, there's always a chance of losing. But some mutual funds are safer than others. Funds that lend money (debt funds) are generally safer than those that buy company shares (equity funds).

About the Author
Jaya Sharma
Assistant Manager - Content

Jaya is a writer with an experience of over 5 years in content creation and marketing. Her writing style is versatile since she likes to write as per the requirement of the domain. She has worked on Technology, Fina... Read Full Bio