What Is The Difference Between SIP & Mutual Fund?

Systematic Investment Plans (SIPs) and Mutual Funds are often seen as two different things. The truth is they are not. Here’s a complete guide to what mutual funds and SIPs are and how they can help you earn higher returns and achieve your goals.

Mutual funds collect money from several investors and all the money is then invested in a mutual fund scheme. They are managed by highly skilled professionals called fund managers.

For example, you want to buy stocks for ₹10,000. Firstly, stock trading requires hours of research and months of tracking the data of a particular stock. You do all your homework and buy the shares of ABC company. Let’s say, ABC company is an IT (Information Technology) firm and it provides its services to clients in Europe and the U.S. One share of ABC costs ₹2000, and you have bought 5 shares. The problem here is that your profits will solely depend on the performance of ABC. If the value of the shares falls, the stock, which was worth ₹10,000 earlier, might be worth ₹8,000 later.

So, how do you remedy this? You take your ₹10,000 and invest across the stocks of several companies, which belong to different industries. In this case, even if the value of one company’s share declines, the other company stocks will be performing well. So, the losses made by one stock will be adjusted by the profits made by the other stocks. This is what mutual funds do. They take your money and invest across various companies’ stocks, debt instruments, commercial papers, and so on. This helps you to earn returns even during stock market crashes.

Before we proceed further, we would like to let you know that we have a glossary of terms where you can find detailed definitions of the words used in the article. The name of the article is Mutual Funds Terminologies. Please head there if you need to know the meaning of any terminology.

Broadly, mutual funds are classified into two categories. They are open-ended and close-ended funds.

These funds are further classified into equity, debt, and hybrid mutual funds.

They invest in fixed-income instruments, such as corporate and government bonds, corporate debt securities, money market instruments, etc., Woah, that’s a lot of jargon. Let us break it down.

Firstly, what is a bond? In simple terms, bonds are a loan. When you buy bonds, you are lending money to the entity that is issuing the bond (issuer). The entity could be the government, a company, or a bank. The issuer is generally obligated to pay interest at set intervals over the bond's life and then repay the principal amount when the bond matures.

Debt mutual funds buy these bonds and they are ideal for investors who want regular income but are risk-averse. They are less volatile, and hence, are less risky than equity mutual funds. If you are someone who is already putting money in traditional fixed-income products like Bank Deposits, then you can consider investing in debt funds.

They invest in more than one asset class i.e. equity, debt, and other asset classes depending on the investment objective of the scheme. There are different hybrid funds based on their asset allocation. They include Aggressive Hybrid Fund, Conservative Hybrid Fund, Dynamic Asset Allocation Fund, Multi-Asset Allocation Fund, Arbitrage Fund, and Equity Savings Fund.

Systematic Investment Plans might sound like they are a type of mutual fund too. However, SIPs are one of the modes in which people invest in mutual funds. There are two modes in which you can invest in mutual funds. One is lumpsum and the other is SIP.

A Systematic Investment Plan (SIP) is a plan that allows investors to make regular, equal payments to a mutual fund scheme. If you choose to invest ₹3,000 in an equity mutual fund scheme every month via SIP, then that amount will be deducted automatically from your bank account on the date of your choosing. Just like how Recurring Deposits (RDs) deduct money from your bank account in regular intervals, SIPs do the same.

Let's say that you start investing ₹10,000 every month and this investment would create units in the mutual fund based on the NAV (Net Asset Value). If the NAV is 25, then 400 units would be allotted (10,000/25=400).

The NAV is the reflection of the market movement on which the fund is based and it can go up or down based on how the market functions. If the stock market trades lower, you would be allocated more than 400 units and vice versa. However, the amount you pay (i.e. ₹10,000) will remain the same even if you are allocated over 400 units or less than 400 units per month.

When you examine the example closely, you can see that when the NAV is high (likely when the market is up), the number of units allotted for the same ₹10,000 SIP is lower compared to the month when the NAV is low (the market is down). Over time, as your SIP progresses, you will have invested across all market phases. So, your average cost will be reasonable. This is called rupee cost averaging.

If you wish to know how much you need to invest every month via SIP to achieve your goals, please check the SIP Calculator, created by Koshex.

Mutual funds are a famous investment instrument, preferred by many young Indians, while SIPs are one of the investment modes in which people choose to invest via mutual funds. SIPs are a great way to invest in mutual funds as you can start investing for as low as ₹100 in a mutual fund scheme of your choice.

SIPs are a great option for beginners and experts alike, as your money will compound and become a sizable corpus in the long run. Be it short-term goals or long-term goals, SIPs can be used to achieve all your dreams.

Now, you can grow your wealth easily by creating an account with Koshex in less than just 60 seconds and without any paperwork. Head over to Koshex today!