Understanding The Difference Between Mutual Funds And SIP

Mutual Funds are an investment vehicle, wherein the fund manager gathers a pool of money from investors to invest in stocks, bonds, and other assets. They are actively or passively managed, and you do not have to choose the specific stocks or commodities to invest in. Instead, your fund manager, along with their team of professional analysts, manage and operate these funds for you.

On the other hand, investors also enjoy a lot of freedom when it comes to investing in Mutual Funds; investing in Mutual Funds can be done as a lumpsum payment or through a Systematic Investment Plan (SIP).

A SIP is not a product in itself; instead, it is a method of investing money in a Mutual Fund scheme. So let us understand the crucial differences between Mutual Funds and SIP so you can start your investment journey.

What is a Mutual Fund? 

A Mutual Fund is a pool of funds gathered from multiple investors designed to reach a specific fund goal while minimising the risk for investors. This pool of investment is invested in various financial instruments like stocks, bonds, commodities etc. When you invest in a Mutual Fund through your Demat Account, you buy units of that fund instead of directly buying the securities. Mutual Fund investments bring a distinct level of diversification which can act as a cushion against the volatile nature of the market.

Mutual Funds give you a lot of flexibility when it comes to investments. As stated above, the two primary methods of investing in mutual funds are SIP and lumpsum payment. As the name suggests, SIPs allow you to systematically invest a certain amount in a Mutual Fund scheme at predetermined intervals, while lumpsum payments allow you to purchase units of the fund with a single transaction.

What is a SIP?

A Systematic Investment Plan (SIP) lets you balance your investment over a given period of time. With SIP, you can pay a small amount regularly towards a Mutual Fund scheme. The periodicity of these payments can be weekly, bi-weekly, monthly, or quarterly. The allure of a SIP is that it allows you to invest regular amounts in a Mutual Fund and build a good corpus over time while also promoting financial discipline.

SIP is a disciplinary way of investing, especially for beginners. This lowers the entry bar for beginners, giving them an easy and convenient way to get involved in the financial markets. The minimum contribution amount required to commence your SIP investment is only Rs. 500.

What is the difference between SIP and Mutual Funds?

If you are confused about the difference between Mutual Funds and SIP, imagine Mutual Funds as a product on an e-commerce site. When you buy the product, you have the option to pay for it with a single transaction using your Debit/Credit Card, or you can choose to pay through small instalments that debit from your bank account every month. SIPs are like the instalments that you pay over a given period to purchase said product.

SIP vs Lumpsum Mutual Funds: Which is better for you?

A lumpsum investment in Mutual Funds can be beneficial when the equity market is bearish as the returns are higher compared to an investment made in bullish markets.

Generally, SIP is a safe investment method since it adjusts to the equity market fluctuations and allows you to benefit from rupee cost averaging.

Mutual Funds are a diversified pool of securities that minimise the risk for investors. At the same time, a Systematic Investment Plan (SIP) is a method of investing in a Mutual Fund scheme. SIP is a good way to invest small amounts at fixed intervals. You can even use the HDFC Bank SIP calculator to gauge the potential returns from your SIP.

To learn more about SIP or to apply for a Demat Account at HDFC Bank, click here.

Read more about lumpsum investing or SIP investing and its benefits here.

*Terms and conditions apply. The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. This is an information communication from HDFC bank and should not be considered as a suggestion for investment. Investments in securities market are subject to market risks, read all the related documents carefully before investing.