Whenever investing in mutual funds, investor wants to know SIP Vs mutual fund – which is better and can give better returns with lowest possible risk. In fact, SIP and mutual fund are one and same thing. These are the two methods of investing in mutual funds.
Before understanding Mutual Fund or SIP, let’s understand both one by one with the help of examples.
Table of Contents
What are mutual funds
Mutual funds are investment schemes that pool money from multiple investors.
Now These mutual fund schemes invest the pooled money to buy securities such as stocks, bonds, or other financial assets.
The mutual fund schemes generate profit or loss depending on market conditions, economic parameters, stock/security selected by the portfolio manager and team.
This profit or loss is passed onto investors in the format of NAV increase or decrease.
Now once you sell/redeem your mutual fund units, you can book this profit or loss.
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How Mutual Fund works -Example
Now let’s take example of Mr. Dinesh. He wants to invest in mutual fund scheme.
He decides to invest Rs. 300000 and invest in Axis Bluechip Fund in one go ( mutual fund lump sum investment).
It’s a real example of Axis Bluechip Fund ( just for understanding purpose). The money is invested on 26/2/2018 and redeemed on 27/2/2023.
Here 3 lac money worth investment became 5 lac in a span of 5 year.
Please NOTE– this is a market linked return, and this return subject to change with time market fluctuations and other factors. The return of other schemes might be more or less than this MF investment.
Who manages Mutual Funds?
A mutual fund scheme is managed by a professional fund manager who invests the money on behalf of the investors according to the fund’s investment objective.
Benefits of Mutual Funds
Diversification:
Since a single mutual fund invests in a number of stocks/securities, which adds diversification to the portfolio. Such diversification is otherwise difficult to get.
High Liquidity
In addition, mutual funds are highly liquid, allowing investors to purchase or sell shares at any moment.
Wide Variety of fund options
Mutual funds offer diverse investment solutions to investors of every kind. One can invest for a very short period 1 day to an extremely long duration.
Mutual funds come in a wide variety of forms, such as equity funds, bond funds, index funds, and sector-specific funds.
Every kind of fund has a unique investment goal and approach, which can run the gamut from conservative to aggressive. Before investing in a mutual fund, investors should carefully examine their financial goals, risk tolerance, and investment horizon.
Professional management
A professional fund manager & team manage your money at a meagre cost. Because of the large AUM professional management fees become quite low compared to benefits.
SIP Full Form & SIP meaning
SIP Full form (in mutual fund) is Systematic Investment Plan. Basically SIP is a method of investing in mutual funds in a systematic and disciplined manner. For example Dinesh starts a monthly SIP of Rs 5000 in a mutual fund for 1/2/3/4/5….99 years.
A SIP investment allows investors to make fixed investments in mutual funds at predetermined periods, typically monthly or quarterly.
When an investor begins a SIP, they give their bank permission to take a set amount of money each month from their account and transfer it to the mutual fund on a predetermined date.
The mutual fund uses the money to purchase fund units at the current market price. ( please refer to the below image).
Step by Step procedure to start SIP
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One of the main advantages of a SIP is that it encourages investors to make consistent investments, which helps to achieve their long-term financial goals.
Read more about Goal Based Investment Planning
Regular investment and long term investing aids to increase returns and thus investors can take advantage of the power of compounding to lead to significant wealth creation over the long term.
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How SIP mutual fund works
SIP or systematic investment plan (SIP) mutual fund enables participants to make fixed investments into a mutual fund on a regular basis (often monthly).
SIP Working with Example
The first step is to pick and choose a mutual fund scheme which fits your investment goal, risk tolerance, and budget.
You can accomplish this by researching a range of mutual funds and evaluating their performance, fees, and other features.
- Select a Fund of your choice.
- Choose SIP amount ( Tip: you can start with as low as Rs 500)
- Choose frequency monthly, quarterly, half yearly or yearly
- Choose SIP deduction date
- Fill your form online or offline.
- Pay first SIP amount via cheque or online payment
- Automatic money deduction from the bank from next month.
- Mutual fund units are purchased at the prevailing NAV
- MF unit accumulation at different NAV ( unit price)
- You sell units in future and book profit or loss.
Now Let’s take example of Mr. Dinesh, wants to start a monthly investment of Rs. 1000. He chooses his SIP deduction date on the 2nd of every month.
Now Let’s understand SIP Return rate also with example given as in the case of mutual fund example.
SIP Mutual Fund Benefits
- Disciplined Investment
- Choose your investment amount
- Minimum SIP amount Rs. 500
- Averaging out the cost of investing
- Make market timing irrelevant
- Benefit of compounding
- High Liquidity
- flexible investment option
- Helps in easy Goal achieving
- Multiple investment option to choose from
- Professional management
- Help Create Wealth
SIP Mutual fund helps an investor to invest the desired amount monthly ( most usual frequency people choose). The best part is you can increase this amount periodically or whenever you want and build a sizable corpus.
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Learn how you can become a crorepati with the monthly investment of Rs 5000.
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Mutual Fund Vs SIP
SIP or Mutual Fund- which is better?
Mutual fund and SIP both are the same and one thing. SIP is a method to invest in mutual funds. To understand the difference between lumpsum and SIP investment please refer above video.
Conclusion
The choice of SIP or lump sum depends on your investment objectives, risk tolerance, financial status, and investment horizon will all influence the type of investment you make.
You can put a lump sum amount into mutual funds at once if you have a lump sum to invest and are comfortable taking risks.
Otherwise, SIP is also a smart alternative if you are comfortable to invest regularly and systematically.
However, as per our take an investor can start investment in both the ways lump sum and SIP. One can start investment by investing a lump sum amount in one fund and starting SIP in the same fund.
SIP offers a number of advantages, such as disciplined investing, cost-averaging, and the chance to profit from compounding returns over time. On the other hand, if the markets perform well, investing a lump sum can result in better returns over the short term. ( you can refer the charts given above)
In conclusion, both SIP Vs mutual fund have their advantages and disadvantages, and the choice between the two or investing in both depends on your choice, comfort level and other parameters such as investment goals, risk profile, and financial situation.
Want more
How to Plan Your Investment?
You can always work with a Certified Financial planner and plan your finances, including Emergency funding, building a corpus for house purchase, and taking care of your health needs so that you can plan a better retirement income in your second inning, leading to a more secure and financially stable retirement.
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