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Mutual funds and systematic investment plans (SIPs) are always mentioned together, but they are not the same. Mutual funds is an investment products, whereas SIP is a method of investing in them. Understanding the difference between them can help you make better financial decisions. This article explains how a mutual fund is different from a systematic investment plan.
What is a Mutual Fund?
A mutual fund is an investment vehicle that combines the capital of several investors to form a portfolio. The collected capital is then strategically invested in a variety of financial instruments such as stocks, bonds, and other securities. Investing in mutual funds helps to diversify your investment risk. Thus, by investing in a mutual fund, you can diversify your investment and reduce the risk at the same time.
Additionally, you get professional management, as the fund manager of the mutual fund has a detailed background in the market along with an expert team backing him up. The fund manager makes informed decisions about where to allocate assets to generate reasonable gains for investors.
What is SIP?
A systematic investment plan is a way to invest in a mutual fund that encourages regularity and discipline. In SIP, investors make a regular contribution, usually monthly or quarterly, instead of a lump sum. People who prefer to invest small amounts over time rather than a single large sum may consider investing through SIP. In addition, SIP makes it easier for investors with different income levels to participate in the financial market. Also, SIP helps reduce the impact of market volatility through rupee cost averaging.
Difference Between SIP vs Lump Sum
SIP is not a separate investment option from mutual funds; in fact, it’s a mode of investing in mutual funds. So, here’s a comparison between SIP and Lump Sum Investment, as both are ways to invest in mutual fund schemes.
Investment Amount
A lump sum investment allows you to invest a big amount at once. A SIP, on the other hand, allows you to invest small amounts at regular intervals that can be monthly or quarterly. This makes it easy for people who want to start small.
Market Impact
Lump sum investments have a direct impact on the market’s ups and downs. SIPs, on the other hand, reduce this impact because the investment is spread out over time. This helps in averaging out the cost.
Fees and Charges
In both the SIP and lump sum investments, certain charges are involved, like fund management fees and transaction costs. However, the charges may seem higher with a lump sum investment as compared to charges on SIP investments.
Withdrawals
Withdrawals from both lumpsum and SIP investments are subject to the fund’s exit load and redemption terms. However, with lump sum investments, the exit load may be more noticeable in value because of the large amount involved.
SIP vs Lump Sum Mutual Fund Investment: Which One Should You Choose?
If you have a lump sum to invest in mutual funds, it is generally more suitable when markets are low or undergoing a correction. This will help you to purchase units at a lesser cost, thus possibly more long-term gains.
Alternatively, SIPs can provide a more systematised and periodic investing method because it allows you to invest a certain amount occasionally. This plan will be suitable to you in terms of market fluctuation due to the average rupee cost. You can also establish, monitor and manage your investments easily by using a SIP app.
Selecting the appropriate strategy of investments should depend on the financial objective, the degree of risk, and the current market performance. That is why it is always good to analyse your needs and be aware of the current market conditions before investing.
Conclusion
To make well-informed investment decisions, you need to understand the difference between a mutual fund and a SIP. There are many brands like Axis Mutual Fund that allow investors to choose from a wide range of schemes and flexible SIP options. Various funds are designed depending on different goals. Whether you prefer the consistency of SIPs or want to invest a lump sum during favourable market conditions, your decision should align with your financial needs and risk appetite.