Difference between SIP and Mutual Fund
Understanding the Distinction between Sips and Mutual Funds.
Investing has also become simpler and more varied over time. With the growing emphasis on financial literacy in India, people are actively seeking ways to enhance their financial well-being. Among the most popular investment options are mutual funds and systematic investment plans (sips). While many people interchangeably use the terms sip and mutual fund, it’s important to understand that sip is a method of investing in mutual funds, rather than a specific investment product.
Let’s break down the concepts of mutual funds and sips, and understand the distinctions between them.
What is a collective investment vehicle?
A mutual fund is an investment strategy where funds from numerous investors are pooled together and invested in a diversified portfolio of stocks, bonds, or other securities. Fund managers who specialize in these funds aim to achieve returns based on the fund’s objective—whether it’s capital appreciation, regular income, or safeguarding capital.
Mutual funds come in different forms based on the type of assets they invest in (stocks, bonds, a combination), their investment approach (growth, value, dividend), and their structure (open-ended, close-ended, interval funds). Investors have the option to choose from these investment options based on their financial objectives, time frame, and willingness to take risks.
When you invest in a mutual fund, you are essentially buying shares of that fund. Each unit within the fund has a value called the net asset value (nav), which fluctuates based on market trends and the fund’s performance.
A sip is a small amount of liquid that you drink.
A systematic investment plan (sip) is a methodical approach to investing in mutual funds. It allows you to allocate a specific sum of money at regular intervals—monthly, quarterly, or even weekly—rather than investing a large sum all at once.
Think of sip as a means to invest in mutual funds, either as a vehicle or a technique. It is not a financial product on its own. By taking regular sips, investors can gradually build a collection of investments, regardless of the ups and downs of the market. Sips foster the habit of consistent putting away and investing money.
Contrasts between ETFs and mutual funds.
Let’s now analyze the key distinctions between the two terms:
1: Characteristics of financial commitment
Mutual fund: a financial instrument or arrangement where you can invest your money. It is a compilation of resources overseen by experts.
Sip: a means or route to invest in mutual funds over a period of time.
2: Method of investment
Mutual fund: you can either invest a lump sum (a significant amount at once) or through systematic investment plan (SIP).
Sip: only allows for regular, periodic small investments spread out over time.
3: Financial adaptability
A lump sum investment in a mutual fund is recommended when you have a substantial amount of money to allocate towards your investment.
Sip: an excellent option for individuals who earn a fixed salary or those who prefer to invest gradually, even with a monthly contribution as low as ₹500.
4: Risk management
Investing a lump sum in mutual funds carries a higher risk if the market is experiencing fluctuations during the time of investment.
Sip: helps in reducing risk by rupee cost averaging, which means buying more units when prices are low and fewer when prices are high.
5: Timing the Market
Lump sum: requires careful timing to maximize returns, which may not be feasible for everyone.
no market timing required. As investments are made at various points, they help to balance out the peaks and valleys of the market.
Which option should you pick?
This decision is solely based on your own financial situation, goals, and willingness to take risks.
Drink if
You have a consistent revenue.
You favor allocating small sums regularly.
You don’t want to time the markets.
You’re saving for future goals like retirement, buying a house, or funding your child’s education.
Invest in lump sum mutual fund if:
You’ve got a windfall, legacy, or cash prize amount.
You are confident in your market prediction and evaluation.
You are open to investing for a short to medium-term period and have the ability to closely monitor market trends.
Taxation perspective.
The tax on investments in mutual funds depends on whether the fund is equity-based or debt-based, as well as the duration of the investment. It doesn’t matter whether you invest through a single payment or in installments, the outcome remains the same. For example:
In equity mutual funds, if you sell your shares after one year, long-term capital gains (ltcg) tax is 10% if the gains exceed ₹1 lakh.
In debt funds, any capital gains are added to your income and taxed based on your tax slab if the holding period is less than three years.
Sips are taxed independently for each payment. If you consistently invest a fixed amount each month for a period of two years and then withdraw the entire sum at once, you will have accumulated a significant amount of money. Each sip installment will be taxed based on the duration for which it was invested.
Thoughts on the Outcome
In summary, sip is a method of investing in mutual funds and not a substitute for other investment products. While mutual funds offer various schemes to cater to different financial objectives, sip is a systematic approach to gradually build wealth and mitigate the impact of market fluctuations.
New investors often prefer sips as they are easier to manage, while established investors can utilize a mix of sips and lump sum investments based on the market conditions. The most suitable approach depends on your income, investment goals, and willingness to take risks.
Regardless of the chosen route, the key to building lasting wealth in the stock market lies in maintaining patience and consistency. It is crucial to assess your risk tolerance and consult with a financial advisor before making any investment decisions.
