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.

Also Read: What is an alternative investment fund: Features, benefits & tax

What is a Mutual Fund?

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 categorized 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

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

SIP vs Mutual Funds: Difference

Here are some of the basic differences between SIP and a mutual fund that you should know:

1. Investment Mode
2. Compounding
3. Flexibility
4. Volatility
5. Cost

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.

Also read: A detailed comparison between small, mid, and large-cap funds

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.

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/-

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

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.

You can start investing in the NAVI Nifty 50 index mutual fund via SIP with an amount as small as Rs. 500 and reap the benefits of the top 50 performing companies.

FAQs on SIP vs Mutual Fund

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Disclaimer: Mutual Fund investments are subject to market risks, read all scheme-related documents carefully before investing.