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Are Mutual Funds and SIPs different? Which is better between a Mutual Fund and an SIP? 

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When we observe the world of securities, mutual funds form the core position. One may hear words like risk, mutual funds, SIP, bull, and bear every 10 seconds.

Amidst the exchanges and governing bodies that regulate the securities market, there is a lot more outside this circle to learn from.

The intricacies of the market are the reason for its volatility. This elaborate structure is a little tough to understand.

But with a steady pace and keen spirit, entities can permeate this world of finance and investment, and even ace it. 

Thereby, let us begin from the basics before we understand the differences between a Mutual Fund and an SIP.

Also Read: Are Mutual Funds Risky? What Are The Alternatives?

What is a Mutual Fund? 

Mutual Funds are money market instruments managed by an expert fund manager. Broadly, they are institutional investors who analyze the market trends, put forth valuable information, interact on behalf of investors and satisfy portfolio diversification. 

Such funds allow investors and potential clients to invest in the top running stocks of the market, guaranteeing them profitable returns. 

Mutual Funds enable stockholders to safely channelize their savings into a plethora of securities. These securities are differentiated on factors like risk-bearing capacity, credit rating, minimum investment, etc.

Defining a Systematic Investment Plan (SIP)

SIP is an investment plan or a method of payment to invest in the mutual fund securities you choose based on your risk appetite and other allied factors.

To invest in a mutual fund, one can choose amongst two methods: 

  1. SIP
  2. Lump-Sum

Under a lumpsum payment, the entity desiring to invest must pay the required amount at once. This fund is then managed by the institution and held as your NAV (Net Asset Value).

Under an SIP payment method, transactions are made at regular intervals of time. These intervals can be quarterly, monthly, or yearly.

Are Mutual Funds and SIPs different?

When we talk about the difference between a Mutual Fund and an SIP, the former and the latter can not be differentiated because they do not fall under the same head.

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Mutual Fund is an institution that invests on your behalf, and SIP is a tool at their disposal that enables you to form a systematic and organized plan for payments and investments. 

Additionally, one can opt for SIP for securities a mutual fund institution offers. The notion that SIP is a security that can be invested in is inaccurate. 

Comparing Their Efficacy

Investment Value

Usually, the lumpsum method is opted for investing in a mutual fund. Such investment carries a significant amount.

On the other hand, an SIP is built so that an investor does not need to burden themselves with large amounts. Therefore, SIP payments are smaller in size.

Investment Form

Under both the circumstances, lumpsum or SIP, one can choose the market instrument they deem fit to invest. Debt Mutual Funds, Equity Mutual Funds, and Hybrid Mutual Funds can be selected. 

Also Read: The Pros & Cons of Investing in SIP

The volatility of the market

Mutual Funds are more affected by the volatile nature of the market than the SIP. Let us study the reason behind the same:

An SIP is a payment regulated at equal intervals. Suppose, the market is bearish in January. Your Net Value Asset is low. As a result, your profits are down.

The market resumes its bullish nature in February. Therefore, your investments in February rise and earn surplus profits.

But under a mutual fund, when a lump sum is made in January, the entire amount is stuck in a loss. Though it shall rise once the market returns to its bullish nature.

The impact of volatility on the mutual fund investor is higher than an SIP investor because a small part of their investment faces the bear market.

The relative effect is more significant in magnitude for the lumpsum payers. 

Maintenance Charges

The annual maintenance charges are higher for the mutual fund than an SIP because they involve a more significant amount.

The trade value, transaction cost, and the fund manager’s fee incline on the higher side for the lumpsum payment method. 

Redemption

The Redemption of both schemes is equally effective and easy. The redemption charges are higher for the mutual fund than the SIP. 

Conclusion

Comparing Mutual Funds with SIP is like initiating a differentiation between apples and oranges.

They are both completely varied concepts. While a Mutual Fund is an investment vehicle, an SIP is a payment method that drives the investment vehicle.

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