Difference between SIP and mutual funds

Differences between a Mutual Fund and SIP with Examples

The difference between a mutual fund and SIP is important to understand for better understanding of finance and investing. People often confuse both to be an investment product which is totally not true. In this article, we shall delve more into these two popular investment terms.

What is an SIP?

An SIP is an investing strategy where investors sets aside a fixed amount of money under a defined time schedule. The money is invested in financial instruments such as mutual funds, fixed deposits, recurring deposits, gold coins, shares etc.

SIPs are an abbreviated form for Systematic Investment Plans. The concept of SIP promotes the idea of automated savings which leads to long-term wealth creation. It is not specific to the asset in which the money needs to be instrument.

People do SIP Investments in different ways by people. Example – say a stock broker is instructed to purchase 1 share of a specific stock on 1st of every month. Another investor purchases NIFTY 50 Index ETF on every week on a Monday. Small, disciplined and periodical investing is what an SIP is.

OK, but is this strategy popular?

The benefits of SIP are immense which is good reason for the growing popularity of SIP among investors in India. Every month, individual retail investors pump over ₹8,500 crores into the Indian stock markets in SIPs. Today, more investors are seeking help on best SIP plans and how to maximize their portfolio returns.

To sum up – SIP or systematic investment plan is an investing strategy. The principle tenets of SIP require disciplined building up of wealth at defined periods of time.

What is a Mutual Fund?

A mutual fund is an investment financial vehicle for pooled money. This money is invested in instruments like stocks, real estate, bonds, commodities etc.

Mutual funds serve the purpose of giving small, big and institutional investors access to professional advice from qualified fund managers. These fund managers allocate the assets to different securities with the intent of accomplishing the scheme’s objective.

What does that mean?

Let me explain with a couple of examples of equity mutual funds

The aim of Mirae Asset Emerging Bluechip Fund is to growth the investor’s wealth. The fund objective clearly requires the fund to stay fully invested in equities within large cap and mid cap companies.

Another fund can have a very different objective. Like, ICICI Prudential Balanced Advantage Fund aims for a relatively conservative approach compared to the Mirae Asset Emerging Bluechip Fund. The fund’s mandate allows them to use an in-house asset allocation model to manage returns & volatility.

As we can see – the Mirae Asset fund’s mandate needs it to be an aggressive wealth-creation oriented fund. However, the ICICI Prudential fund’s objective is to be cautious and offer investors a low volatility portfolio. A mix of equity, equity derivatives and debt is used to achieve these fund objectives.

To sum up the key difference between a mutual fund and SIP is conceptual. A mutual fund is an investment vehicle while an SIP is an investing strategy.

Additional Resources

  1. 5 Steps process on how to start SIP investment online
  2. The best SIP plans to invest in 2020
  3. Top SIPs for long term investing
  4. Complete Investor Guide to Building Wealth with SIP
  5. SIP Calculator