What if I had to ask you a counter question? What would be the difference between a bank account and a recurring deposit? The answer would most likely be, “Nothing”. This response is the same when asked about difference between mutual fund and SIP, “Nothing”. However, many people wrongly assume that these are entirely different products. In reality, a SIP or systematic investment plan is nothing more than an organized and consistent investment in mutual funds. A mutual fund is an expert-managed pool of assets created by a fund manager. An investor can choose from a variety of options such as equities, debt instruments, mix of equity & debt or liquid assets. Once invested in a mutual fund, the holder gets proportional ownership in it and can sell at any time unless blocked off due to tax regulations. Now let us examine what separates mutual funds and SIPs and which one is better for Indian investors – mutual funds or SIPs? To address this debate we should first gain knowledge of both concepts.
1) What is a mutual fund and what is a SIP?
Investing in a mutual fund means becoming part of a collective asset pool and obtaining proportional ownership by buying units. Not only are they highly liquid, but can be easily sold both on and offline. Furthermore, this type of investment allows even those with limited capital to benefit from diversification and thus minimise their associated risks. Mutual fund investors also gain access to the expertise of a knowledgeable fund manager, plus the invaluable knowledge of his experienced team.
The SIP is a systematic way to invest in mutual funds. You can either make a one-off lump sum investment, or choose the Systematic Investment Planning route. Through SIP, you decide how often you would like to contribute – it could be weekly, monthly or quarterly. However, monthly SIPs are more popular as they help align investments with your income cycle and provide the advantages of Rupee Cost Averaging (RCA). Ultimately, SIP is an efficient and verified means of investing in equity funds.
2) What are the unique benefits that an investor gets from a SIP
An SIP allows you to invest a fixed amount in a mutual fund scheme on a regular basis (normally an equity or ELSS scheme) based on predetermined dates like every month, fortnight or wee. SIPs are similar to regular savings schemes like recurring deposits in banks and post offices. Here are some of the key advantages of using them for mutual fund investing.
Regular, periodic investments over a long period of time are a proven method of minimizing risk and enjoying good returns. You are most likely to get the best price by spreading your investment across the time horizon, even in volatile markets. You may not catch the bottom, but you are as close as you can be to it.
By investing over the course of the financial year, SIPs give you the power of rupee cost averaging. As a result, you will be able to average the cost of purchase and beat volatility. Indian households invest close to Rs.7500 crore each month through equity SIPs.
Mutual fund SIP is perfectly aligned with building savings and wealth, as it forces you to treat investments as a discipline and your expenses as residual items.
For small and medium-sized investors in India, mutual funds have become a veritable savings pool. SIPs, as we discussed earlier, are just tools for a smarter and more economically rational way to invest in mutual funds. With minimal risk and professional management, they can save and create wealth through equity investments.
