In recent years, mutual funds have gained significant traction among new investors. An important factor contributing to this increased popularity is the simplicity with which mutual funds may be invested by the average person. Investing in mutual funds is frequently confused with investing in systematic investment plans (SIPs). We have written the following essay to assist you in putting an end to this misconception and get it over with by describing what a mutual fund, as well as a SIP, are, along with the difference between SIP and mutual fund.
What are Mutual funds?
A mutual fund is a collection of money collected from investors with the goal of investing in order to attain a shared goal or set of goals. Investments in a variety of assets, such as stocks, bonds, as well as money market instruments, can be undertaken in order to generate returns while also attaining the stated purpose. Each investor’s participation is proportional to the number of units owned by him or her, and the fund is professionally run by an investment manager (AMC). It is necessary to understand mutual funds in order to get the difference between sip and mutual fund.
What exactly is SIP?
Full form of SIP is systematic investment plan in its abbreviated form. Unlike mutual funds, which are investment products or instruments, systematic investment plans (SIPs) are a technique of investing in mutual funds. As clear from the name itself, a mutual fund SIP allows you to invest periodically in a mutual fund scheme. As you can see, SIPs are not distinct from mutual funds; rather, they are a component of them.
SIPs help investors maintain discipline in their investments by requiring them to make small but regular contributions to a specified program over a period of time. One may pick the frequency of investing here, including daily, weekly, monthly, fortnightly, or yearly, and then adhere to that schedule carefully in order to develop a corpus of assets. The money is automatically deducted from the investor’s bank account when he or she selects a frequency as well as a date for the withdrawal.
Here’s a detailed difference between sip and mutual fund-
Here’s a detailed discussion of the SIP vs Mutual Funds
The investment approach
Whenever you make an investment in a mutual fund SIP, the asset management company (AMC) deducts a specific sum from your designated bank account on a fixed date. You have the option of selecting a time frame for your investments, which could be weekly, monthly, quarterly, or biannual. With solid mass investments, you have the flexibility to invest any amount of money at any moment after evaluating the current market circumstances.
Market research and analysis
Because lump-sum investments entail a large financial commitment, investors must be aware of the date on which they want to enter the market. Lump-sum investments are also most advantageous when made at a time when the market is at its lowest point. SIPs, on the other hand, provide you the opportunity to enter the market at different times of the year. Investors do not have to pay as careful attention to market moves as they would if they were making a lump-sum investment.
Averaging value of rupees
In a bearish market, you will decide to purchase more units of a mutual fund scheme because the price of the share per unit decreases, which will result in you purchasing more units. Nevertheless, during a positive trend, whenever the fund’s net asset value (NAV) is high, you will be assigned fewer units. In the case of mutual funds, you must purchase all units at the current net asset value (NAV), with no space for rupee-cost averaging. You can also learn more on sip vs mutual fund here.
SIP investments provide you greater freedom because you may invest modest sums on a regular basis on a monthly, bimonthly, or quarterly basis, depending on your preference and financial situation. As a result, SIP is the greatest option for salaried individuals or individuals who have consistent financial flows.
SIPs enable you to invest in mutual funds without having to make any changes to your current way of life or spending habits. Investment in such a mutual fund scheme could be made in bulk when you have an excess of funds available to you. It is among the deciding factors when it comes to the difference between sip and mutual funds.
Why do most people prefer SIP after knowing the difference between SIP and mutual fund?
There are several advantages to using SIP. When you make regular investments over a period of time, regardless of market conditions, you will end up with more units whenever the economic condition is low, as well as fewer units whenever the current market is high, as shown in the chart below. As a result, the acquisition value of the mutual funds of an investor is averaged out in this manner.
SIP provides a significant additional advantage, which is commonly referred to as the “eighth wonder of the world.” The power of compounding is responsible for this advantage. When you make regular investments beyond a long period of time, you will get a larger rate of return because of compounding. Small amounts of money invested over time, even on a regular basis, can contribute to the achievement of long-term financial objectives.