Demystifying the Difference Between SIP and Mutual Funds!

Introduction

Do you come across those television ads suggesting you invest in a Systematic Investment Plan or SIP and ending with ‘Mutual Funds Sahi Hai’? Mutual funds have hit Indians like a wave in recent years. In the span of a decade, the Asset Under Management (AUM) in India, specifically for mutual funds, has surged by more than 600%.

Despite India’s large population, many people are unaware of the intricacies or concepts of mutual funds. Some may even perceive mutual funds and SIPs as different investment avenues. 

However, there is a crucial difference between SIPs and mutual funds, which may affect the investment decision. Let’s explore it in detail and understand it with an example.

All About Mutual Funds!

It can be explained as a professionally managed pool of funds that can be allocated in a varied range of assets based on the category. Mutual funds can be an avenue for the opportunity to invest in assets which may not be possible for a single investor’s corpus. Moreover, this facilitates diversification of exposure for a portfolio. 

It is regulated by the Securities Exchange Board of India (SEBI), that categorised the schemes based on assets. These categories, along with the number of current schemes in each, are as follows:

Source: Mutual Funds Monthly Report (data as of October 2024)

Investors can analyse their financial objectives, match the risk profile and seek a suitable mutual fund scheme. Apart from this, mutual funds also provide different plans to facilitate the purchase or redemption (sale) of mutual fund units.

SIP: A Mutual Funds Facility

Systematic Investment Plans (SIPs) are one of the most popular aspects of mutual funds investment. These are facilities for gradual and small investments to avoid lump sum burden. It gives investors an option to invest regularly. In this, investors can use standard instruction facilities or manually transfer the SIP amount every month to the mutual fund scheme or stocks.

Previously, people were accustomed to recurring deposit bank accounts, which have a similar process to SIP. However, doing a SIP in mutual funds provides market exposure, which has the potential to generate significant returns. Apart from this, SIP offers many benefits as follows:

• Rupee Cost Averaging – When investors deposit a sum towards the investment at regular intervals, different numbers of units may be purchased based on the scheme’s Net Asset Value (NAV). During the redemption of these units, if the NAV increases, the overall investment cost would potentially spread out. 
• Small Investments – In mutual funds, SIP may start as low as ₹500, and it further provides an opportunity for mass to participate. Investors can also get exposure to diverse assets in one scheme. Moreover, due to mass participation, risk is spread across the investors.
• Compounding – The intrinsic value of money erodes as the time passes. Small amounts and regular investments may encourage investors to start investing early. It further provides the required time for compounding.

Despite such classification, investors may get confused about the SIP and mutual funds difference. Let’s clarify it in detail.

Difference Between SIP and Mutual Funds

In India, the total SIP contribution has mounted up to ₹25,323 crores as of October 2024 and owing to the popularity of mutual funds, it may increase. However, investors should understand what is the difference between SIP and mutual funds before investing.

Rather than confusing SIP as an investment product, investors should understand it as a method or facility to invest at regular intervals.

Let’s understand with an example!

Mr. ABC invested in two mutual fund schemes as follows:

• He made a SIP of ₹1500* in an equity-oriented scheme. Based on the NAV, his investment value will vary as follows*:

Similarly, the number of units will be calculated for the rest of the months of SIP. Finally, at the time of redemption, these total units will be sold based on the NAV.

• He made a lump sum investment of ₹7500* in the mutual funds. He is not required to pay any other charge or costs until redemption. Only if he redeems the mutual fund units before the prescribed period.

*The figures presented in the example are only for illustration purposes and may not be viable as actual investments. Investors should connect with their financial advisor for more details.

Summary

In the modern era, investments have become a crucial decision and demand through research or assistance. In the wake of the growing popularity of mutual funds, investors may blur the SIP and mutual funds difference. However, SIP is a facility that can facilitate investment in products like mutual funds. Investors should understand their product holistically before investors or seek the help of authorised financial experts.

Disclaimer: The information provided is for informational purposes only. PowerUp is not responsible for any errors, omissions, or outcomes related to using this information.