What is the Difference between SIP and Mutual Funds?
In case you’re just starting out on your investment journey with mutual funds, you must have come across the word SIP or Systematic Investment Plan. Similarly, you may have heard or read different definitions of mutual fund and SIP. That’s because there’s still a lot of confusion among people regarding the difference between the two.
However, just like a bank account and a recurring account are not mutually exclusive, SIPs and Mutual Funds are somewhat similar too. But there are still a few noticeable differences that separate the two. In this Navi-pedia blog, let’s dive into the age-old SIP Vs Mutual Funds debate.
What is SIP?
SIP stands for a systematic investment plan – a disciplined and systematic method of investing in mutual funds. When investing in mutual funds, you have the option to either invest the entire amount in one go, known as lump-sum investments or break it into small parts payable every month/quarter through SIP.
For example, you can either invest Rs. 10,000 via lump sum or divide the sum into ten parts and invest Rs. 1,000 each month through SIP.
Almost all mutual fund schemes have SIP facilities, though the minimum amount of investment may differ. In most cases, you can invest as little as Rs. 500 each month via SIP, depending upon your choice of mutual fund scheme.
What are Mutual Funds?
A mutual fund is an investment method that pools money from investors. Then, it invests in individual stocks, bonds, and other securities such as commercial papers, treasury bills, and reverse repos.
You can think of a mutual fund as a basket of securities; created to reach the fund’s objective and lower its associated risks.
Mutual funds can be categorised based upon their maturity period, sectors of investment, risk levels, and orientation towards equity or debt. Index funds, debt funds, equity funds, and hybrid funds are some popular types of mutual funds in India.
Index funds tend to track the performance of benchmark indices (such as Nifty 50) and replicate the same. Debt funds predominantly invest in debt instruments such as bonds. On the other hand, equity funds invest primarily in stocks, irrespective of their inclusion in an index. Lastly, hybrid funds invest in both debt and equity instruments in varying proportions.
With these basics out of the way, we can now discuss the difference between sip and mutual funds.
Also Read: What are blue chip funds: Features, benefits & who can invest
Difference between SIP and Mutual Fund
Here are some of the basic differences between SIP and a mutual fund that you should know:
1. Investment Mode
To make investing more simple and convenient, fund houses offer several modes of investment, such as the following:
- Single or Lump-sum Investment
- Systematic Investment Plan (SIP)
- Dividend Transfer Plan (DTP)
- Systematic Transfer Plan (STP)
- Systematic Withdrawal Plan (SWP)
When you choose SIP as your mode of investment, you can purchase mutual fund units by making regular and equal payments. In addition, SIPs allow you to invest in very small amounts and develop a habit of investing consistently.
2. Compounding
Compounding means that you receive interest on the principal amount invested as well as on the interest that keeps getting added to it. This concept can be a bit confusing for new investors, so let’s understand it by means of an example:
Suppose an investor, Shyam, has invested Rs. 10,000 in a mutual fund. He receives Rs. 1,000 as interest on his investment at the first year’s end. He decides to re-invest this amount to purchase additional fund units. As a result of compounding, he will earn returns on the total investment of Rs. 11,000 going forward.
To make the most of compounding, it is wise to start investing early on. And, an easy way of doing so is to opt for SIP. That way, the amount and returns will accumulate over time to offer more significant returns in the long run.
Let’s say Shyam decides to invest in an index fund via a monthly SIP of Rs. 500 over a period of 10 years. The scheme offers an average profit of 10% annually.
Returns from SIP are calculated using the following formula:
M = P × ({[1 + i]n – 1} / i) × (1 + i)
Where M denotes the amount received on maturity, P is the investment amount, n gives the number of payments made and i gives the interest period.
Putting the above value in the formula, we get expected returns of Rs. 43,276 with a total investment of Rs. 60000.
3. Flexibility
Mutual funds offer much-needed flexibility to investors, unlike most investment options. As the funds are available in smaller units, they are affordable to new investors who wish to make small investments. Moreover, one can enter and exit from a mutual fund scheme bearing the associated fees at any time, which may or may not be the case with other investment options.
SIP provides flexibility by allowing you to invest fixed amounts in regular intervals. In addition, investors can benefit from a variant of SIP called Flexi SIPs, which permits you to change the investment amount based on a pre-decided formula.
As a result, you can easily invest a higher sum of money when the market is low and a small amount when it is high.
4. Volatility
Volatility refers to the downward or upward trends in market indices such as Nifty 50 and Sensex or the returns from securities, over which investors have little to no control. In simpler words, when a market is highly volatile, prices of stocks change dramatically, reaching extreme highs or lows.
For mutual funds, volatility is one of the factors for price discovery – the process of determining the price. Therefore, based on this, investors can decide whether they want to choose a moderately volatile fund such as a large-cap fund or a highly volatile scheme such as a small-cap fund.
In this regard, a SIP enables Rupee Cost Averaging, which lets you use the volatility to your benefit.
5. Cost
SIPs come with the benefit of cost averaging. You can lower the overall cost of purchase by buying more units when the market is down and lesser units when the market is up. This helps you lower your average cost of purchasing.
This is significantly different from lump sum mutual fund investments. For lump-sum investments, you purchase all the units in one go – at a cost that could be a lot higher.
Also Read: A detailed comparison between small, mid, and large-cap funds
Before we move on, here’s something for you. If you’re planning to invest in mutual funds or want to diversify your portfolio, start investing with Navi Mutual Fund. Navi is home to a host of low-cost index funds (refer to our expense ratio), including the Navi Nifty 50, Navi Nifty Next 50 and Navi US Total Stock Market Fund of Fund, among others. You can start investing with as low as Rs.10! Download the Navi app today and start investing based on your investment goals.
Disclaimer: Mutual fund investments are subject to market risk, read all scheme related documents carefully.
SIP vs Lump Sum Mutual Funds: A Comparison
| Parameters | Lump-Sum Mutual Fund | SIP |
| Investment Method | One-time | Regular |
| Volatility | More | Less |
| Cost | More | Less |
| Flexibility | More | Less |
SIPs vs Mutual Funds: Where Should You Invest?
Investing in mutual funds is considered a safer investment option when compared to buying individual company shares. This is especially true for investors who aren’t familiar with the securities market.
Investors who wish to diversify their investment to lower the risk on returns can consider mutual fund investments. Such funds offer exposure to the shares of different companies at the same time. Mutual funds are also easy to purchase and track as they are a transparent investment vehicle.
Additionally, mutual fund investors also get the flexibility to choose their preferred mode of payment. If you do not have the time or means to track the day-to-day fluctuations of the market, opting for a SIP to invest in mutual funds might be suitable for you.
SIPs let you select a fixed amount of money that you would like to invest in the mutual fund at fixed intervals. This can help you average out the losses and improve your profit potential in the long run.
Best Mutual Funds for SIP Investments
| Mutual Fund | Minimum SIP Amount |
| Navi Nifty 50 Index Fund | Rs. 500/- |
| DSP Healthcare Fund | Rs. 500/- |
| Quant Small-cap Fund | Rs. 5,000/- |
| Aditya Birla Sun Life CEF – Global Agri Plan | Rs. 1,000/- |
| ICICI Prudential Ultra Short-term Fund | Rs. 500/- |
| BOI AXA Small Cap Fund | Rs. 5,000/- |
| Motilal Oswal NASDAQ 100 Fund of Fund | Rs. 500/- |
| HDFC Retirement Savings Fund | Rs. 500/- |
| ICICI Prudential Technology Fund | Rs. 5,000/- |
| IDFC Government Securities Fund | Rs. 1,000/- |
| Axis Bluechip fund | Rs. 500 |
| UTI Flexi Cap Funds | Rs. 500 |
| Canara Robeco Bluechip Equity Fund | Rs. 1000 |
| Kotak Equity Opportunities Fund | Rs. 1000 |
| PGIM India Flexi Fund | Rs. 1000 |
Benefits of Investing in SIP Mutual Funds
Here are a few benefits of investing in SIP Mutual Funds:
- Brings financial discipline in the form of regular investments
- Less-risky and flexible (you can start with as low as Rs.500)
- Low-cost and has the potential to beat market volatility with/due to rupee cost averaging
- It saves investors’ time and effort.
Also Read: 10 best performing corporate bonds in 2022
Factors to Consider Before Choosing Between SIP Vs Mutual Funds
The following are some points to keep in mind before choosing a SIP for mutual funds.
- Investment horizon: An ideal mutual fund should be aligned with your investment goals. Before choosing a mutual fund, try to assess the time period you want to stay invested for. Deciding the time frame will give you an idea about the number of SIP instalments you need to pay.
- Cost of investment: The fund’s expense ratio, as well as the entry and exit loads, are all important factors to consider before choosing a mutual fund scheme. Funds with high assets under management (AUM) offer low expense ratios, but they can charge an expensive exit load upon redemption. Investors must be familiar with the numbers before investing.
- Risk analysis: Investors should select mutual funds based on their risk tolerance. Investors with a high-risk appetite can choose equity-oriented mutual funds. On the contrary, debt funds offer stability to risk-averse individuals. Opting for a SIP can lower the level of risk considerably as it distributes your investment across a long period of time.
- Details of the fund house: It is advisable to check the credentials of the fund house in terms of the fund manager’s expertise, the reputation of the asset management company (AMC), other schemes offered by the AMC, etc. Well-established fund houses usually offer a smooth and reliable investment experience.
- Past performance: The performance of a mutual fund over the last 3-5 years can indicate the profitability of the fund. A fund scheme that has consistently performed well against the benchmark is ideal for SIP investments.
Final Word
Now that you understand the difference between SIP vs mutual funds, you know that these are essentially incomparable. A mutual fund is an investment avenue that benefits you by diversifying your investment and reducing its associated risks.
On the other hand, an SIP is just a method of investing in a mutual fund. So, there’s no proper way to describe which is better – SIP or mutual fund.
FAQs on SIP vs Mutual Fund
SIP is an investment mode for mutual funds with which an investor can invest a fixed sum of money periodically. Unlike lump sum mutual fund investments, investors can invest in SIP with small amounts.
Due to the volatile market, mutual funds investments are subject to market risk. As the market is unpredictable, no one can predict whether the prices of stocks will rise or fall.
Usually, Rs. 500 is the lowest SIP amount for most fund houses. However, with Navi, you can start with as low as Rs.10!
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Disclaimer: Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
