November 29, 2022

Paull Ank Ford

Business Think different

Understanding the Difference between Mutual Fund and Systematic Investment Plan (SIP)? 

What Is The Difference Between Mutual Fund And SIP?

Many often confuse in between mutual funds and SIP (systematic investment plan) as both avenues sound similar. Mutual funds are a market linked-investment instrument while SIP is a prudent route of investing in mutual funds. Thus, when you invest via the SIP route, it means you are investing in a mutual fund. 

Check out in detail, the distinction between SIP and mutual fund and how SIP investment can assist you efficiently invest in mutual fund: 

Difference between SIP and mutual fund 

Mutual fund is an investment scheme managed by professionals. The instrument is run by AMC (asset management company) that pools in money from investors like you into bonds, gold, stocks, and other asset classes. Thus,  mutual funds are instruments that aim to multiply your wealth. On the contrary, SIP is an investment route or technique. Via SIP, you automatically can invest a fixed amount at a pre-specified time interval in your selected mutual fund scheme. Thus, SIP is one of the recommended ways of investing your investible in mutual funds. 

SIP in mutual funds – Know how it works? 

When beginning your investment via SIP, you require deciding 4 things: 

·       Mutual fund scheme as per your risk appetite, financial goal, and time horizon 

·       Amount that you can invest 

·       Payment frequency whether quarterly, monthly, weekly etc. 

·       Deduction date 

Once all these 4 aspects are decided, you can begin your SIP. For instance, suppose you want to invest Rs 5,000 per month in X growth fund on the first business day each month. For this, you can open a SIP.  

Decision you must make before beginning your SIP
FundX growth fund – direct
AmountRs 5,000
FrequencyMonthly
Deduction day1st of every month

On opening a SIP, a sum of Rs 5,000 will be deducted from your savings bank account automatically on the first working day per month. On making the investment, you will be provided units of the X growth fund – direct at the NAV (value of per MF unit) on that specific day. This process will continue until you terminate or choose an end date for your SIP (systematic investment plan). 

Investment dateAmount to be invested (Rs)NAV (net asset value)Unit allottedOverall unit balance
2nd August 2021Rs 5,00016952.9502.950
1st September 2021Rs 5,00017002.9415.891
1st October 2021Rs 5,00017752.8178.708
1st November 2021Rs 5,00018932.64111.349
1st December 2021Rs 5,00019002.63213.981
3rd January 2022Rs 5,00020002.516.481
1st February 2022Rs 5,00021002.38118.862

As shown above, the number of units allotted is the function of the fund’s NAV on the investment date. Therefore, if your scheme’s NAV rises, you get lower units and if it decreases, you get higher units. Over time, you will continue to accumulate units i.e., at times a higher number of units will be collected in case of sharp market correction and other times you will receive fewer units in case of sudden market rally. This procedure of accumulating higher and fewer units assists to average the cost of buying the scheme units over the whole SIP tenure. In fact, this disciplined and regular technique of investing via SIP is one of the prudent wealth building methods for attaining your financial goals faster. 

Ending note 

Mutual funds are a financial instrument made up of a pool of money accumulated from investors like you in bonds, stocks, money market instruments and other securities. However, SIP is a simple and easy route through which you can invest meagre amounts of money in mutual funds at periodic intervals. Alongside providing high flexibility in investment, it also allows you to lower your investment cost due to rupee cost averaging and manages market volatilities.