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SIP vs Mutual Fund: Which is Better to Invest

SIP vs Mutual Fund: Which is Better to Invest

SIP vs Mutual Fund: Which is better to invest

We all want our money to keep growing while we are not working and for that, we are constantly looking out for safer avenues where we can invest to multiply our hard-earned money. With the introduction of Mutual funds and SIPs which are less risky than equities and at the same time give us good returns, they provide investors with a good option where they can invest in.


Mutual funds and SIPs are both passive ways of investing in the stock market where people don’t directly invest but instead give their money to asset management companies known as AMCs. Both of them are good indirect ways of selecting good stocks for the long-term.


Here highly qualified and experienced fund managers invest in different asset classes such as stocks, bonds, and commodities on behalf of the people and in return charge a commission for their expertise. Let’s dive deep into detail to find out in mutual funds vs SIPs, which is better and what the differences are between them.



What are Systematic Investment Plans (SIPs)?

SIP’s full form is Systematic Investment Plan and are similar to mutual fund investments in terms of proportionate ownership by purchasing units of a fund but in mutual funds, you generally pay in lump sum whereas, in SIP, you invest a comparatively smaller amount as compared to mutual funds at regular intervals at the prevailing NAV.


The process of how to invest in SIP is simple if you are investing Rs.10,000 every month and in a particular month the NAV is 25 then you will get 400 units. Whereas if at some other point, the NAV is 23.50, then you will get 425.23 units.


Investing in SIPs provides the best returns when you start investing early and therefore it is important to understand why you should start investing early in the stock market. Given the non-speculative nature and safety of investing in mutual funds, they are one of the best alternatives for government employees to invest in the share market.


SIPs are also managed by fund houses and AMCs, and you get the benefit of diversified investments. SIPS are done with the aim of unleashing the power of compounding as the returns of one period of investments are re-invested and investors earn higher returns in the long term.



Special benefits of SIPs

  • It provides the convenience of investing systematically which could be weekly, fortnightly, or monthly based on investor’s preference and income inflows.
  • If we compare mutual funds to SIP, SIPs give an investor the benefit of Rupee Cost Averaging which is nothing but expanding your investments over the financial year to average out your cost of buying and keeping the market volatility in check.
  • It is a safer method of reducing the risk of short-term market volatility and enjoying good returns in the long-term by constant periodic investments.



What is Mutual Fund?

A mutual fund is an indirect form of investment in which authorized fund houses such as banks and Asset Management Companies (AMC) accumulate funds and trade on the behalf of others. The objective of mutual funds is to give maximum returns with lower risk and to equity mutual funds are regulated by SEBI(Security Exchange Board of India) only.


In mutual funds, the risk of market volatility is reduced as the investment is diversified across different asset classes and the loss incurred in one can be compensated by earning profits from the other. Infact, the fund managers keep the threshold level in mind which may be the average index return of the country and aims to give returns surpassing the threshold level by using their expertise and experience.


Mutual funds are a good option to give to your loved ones as they are safer, and you invest in stocks indirectly by investing in mutual funds. However, if you want to give a high-risk high-return option then you can learn how to gift stocks.


Investment in mutual funds is generally done in a lump sum and the fund manager creates a portfolio by investing in various asset classes. There are different types of mutual funds such as small-cap, mid-cap, large-cap based on the investment size, Index funds and theme-based fund and ETFs based on the investment that aim to achieve different objectives.



Differences between SIP and Mutual Funds

  Mutual Funds SIPs
Method of Investment In mutual funds, an investor invests purchases units of an investment scheme in lump sum. In SIP, the investor invests a fixed amount in a mutual fund scheme of his choice in regular intervals.
Rupee Cost Averaging In mutual funds, you don’t get the benefit of rupee cost averaging as you invest by making a one-time payment. SIP is a method of investment where investors get the benefit of rupee cost averaging as they invest a fixed amount periodically and helps them beat short-term market volatility.
Market volatility The stock market fluctuates up and down constantly, especially in the short term and due to large investments involved in mutual funds, it impacts significantly on its returns. As the investment amount in SIPs is small and recurrent in nature, the short-term market volatility has less impact on SIPs in comparison to mutual funds.
Charges If we compare mutual funds to SIP, the charges such as annual maintenance charges and transaction charges are on the higher side as the investment amount is higher. In SIP, the charges such as transaction charges or commission are on the lower side due to the recurrent nature and lower volume of the investment.
Redemption charges Mutual funds are highly but their redemption charges are on the higher side. SIPs are also very liquid, but their redemption charges are lower in comparison to mutual funds.



To Sum up

Both mutual funds and SIPs are two faces of the same coin and are concerned a safer bet keeping in mind the long-term perspective of investing. Therefore, investing in both these avenues is less risky than equities because of the third-party involvement.


The increased awareness among people regarding investing and rise in the number of different mutual fund companies growing scope of mutual funds.


However, if you are a newbie in the world of investing then it is advisable to invest in mutual funds via SIP as you beat short-term market volatility by averaging your investment but if you want to earn better returns than the market indexes and have more funds at your disposal with a better risk appetite, then you could go for invest lump sum investment in mutual funds.



Ques 1.  SIP vs Mutual Fund which one is better


Parameters SIP Lump-sum Mutual Funds
Investment way Regular One time
Flexibility High Low
Cost Less due to rupee cost averaging High as the investment is done in a single transaction
Volatility Less impact More impact


Ques 2.  Which is more profitable, SIP or mutual fund?

Ans- Mutual funds are better for higher returns and profits over SIPs when the return is gradual over time.  


Ques 3.  What is cagr in mutual fund?  

Ans. CAGR stands for Compound Annual Growth Rate. In other words, it is a measurement of the average annual growth rate of an investment over a certain period of time. CAGR is used in mutual funds in order to calculate the profits an investor earns over time.


Ques 4.  Ques- what is idcw in a mutual fund?

Ans. It is a term used to refer to the distribution of income from a mutual fund scheme, which may consist of both dividends paid by stocks and capital gains obtained through the sale of underlying stocks.


Ques 5.  Is mutual fund safe?

Ans- The mutual fund market is safe if you have a good understanding of them. The risks associated with mutual funds are relatively low and minimal compared with other investments.

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