What if I were to ask you a counter question? What is the difference between a bank account and a recurring deposit? An RD calculator shows you the profit you will earn on your recurring deposit, as well as the total amount you will receive at maturity. You answer would be “Nothing”. That is exactly the answer to the question of difference between mutual fund and SIP, “Nothing”. However, a lot of people get confused about mutual funds and a SIP as two mutually exclusive products. What you need to realize is that a SIP or systematic investment plan is nothing but a regular and disciplined investment in mutual funds. A mutual fund is a professional pool of assets created by a fund manager. As an investor you have to choose and you can either invest in a pool of equity assets, debt assets, mix of equity & debt or liquid assets. Once you invest in a mutual fund, you get proportional ownership in the fund and you can sell at any time, unless there is a lock in due to tax clauses. Let us look at what is the difference between mutual fund and SIP, and which is better SIP or mutual fund. To take forward this mutual funds’ vs SIP India debate, let us first focus on these two concepts.
A mutual fund investment is a pool of assets in which you get proportionate ownership by purchasing units. These are highly liquid and can be sold either online or offline. The idea behind a mutual fund is to get you the benefit of diversification of risk. On your own you are limited by your capital to invest in equities. By buying mutual funds you can get the benefit of diversification with the same investment and thus reduce your risk. You also get the b onus of professional management as the fund manager of the mutual fund is an expert who has a huge combined experience in markets and also an expert team at his disposal.
The SIP, on the other hand, is just a method of investing in a mutual fund. You can either reinvest in mutual fund as a lump sum or as a SIP. The SIP stands for Systematic Investment Planning. It allows you to invest systematically, and it could be weekly, monthly or quarterly based on your preference. But, the most popular method of doing SIP is the monthly format as it also enables you to sync your mutual funds with your inflows. SIP gives you some special advantages in mutual fund investing as it is more in sync with your income flows and also proffers the benefit of rupee cost averaging (RCA). SIP is just a scientific and proven tool of investing in mutual funds, especially equity funds.
SIP is an option of investing a fixed sum in a mutual fund scheme (normally an equity or ELSS scheme) on a regular basis i.e. predefined intervals of wee, fortnight or month. It is similar to regular saving schemes like a recurring deposit in a bank or a post office. Here are some of the key advantages of opting for SIPs as a tool of mutual fund investing.
It is a tested method of minimizing risk and yet enjoying good returns, by regular, periodic investment, over a long period of time. By spreading your investment across the time horizon, you tend to get the best price even in volatile markets. You may not catch the bottom of the market but you are as close as possible.
SIP gives the power of rupee cost averaging which is nothing but staggering your investments over the whole financial year. It will help you to average the cost of purchase and beat volatility. Indian households invest close to Rs.7500 crore each month through equity SIPs. That is how popular it has become.
Above all, it brings financial discipline to your life. You are forced to treat investment as a discipline and treat your expenses as a residual item. That is how savings and wealth are built and mutual fund SIP is perfectly synchronized with that.
Mutual funds have emerged as a veritable savings pool for small and medium sized investors in India. They can save money and create wealth through equities with minimal risk and the benefit of professional management. SIP, as stated earlier, is just tool of a smarter and more economically rational way of investing in mutual funds.
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