The Difference Between SIP and Mutual Funds: What You Need to Know?

A common dilemma for many investors is choosing between a Systematic Investment Plan (SIP) and mutual funds. While both allow you to invest money in the stock market, there are some key differences between SIP and mutual funds. 

Read on to understand the comparison of SIP and mutual fund differences across various parameters to help you decide which investment vehicle better suits your needs.

What is an SIP?

A Systematic Investment Plan or SIP is a method of investing a fixed sum of money at regular intervals to purchase units of a mutual fund scheme. The key features of SIP are:

• Fixed periodic investments: You invest a set amount, e.g. ₹5,000 every month on a pre-defined date. This invests your money across both highs and lows of the market.
• Auto-debits from bank account: The SIP amounts get automatically deducted from your bank account on their due dates.
• Long-term investing: SIP encourages investing discipline for 5-10 years or more.
• Flexible – You can choose the SIP date, amount and interval (weekly, monthly, etc). You can also pause or stop investments anytime.

What are Mutual Funds?

A mutual fund pools money from numerous investors and invests it across stocks, bonds and other assets. Each investor owns shares or ‘units’ proportional to their investment amount. The key aspects are:

• Professional management: The funds are managed by qualified fund managers who take all investment decisions.
• Diversification: By investing across asset classes and securities, mutual funds reduce the overall risk of the portfolio.
• Variety of schemes: Funds offer schemes catering to different investment horizons, asset classes and risk appetites of investors.

What is the Difference Between SIP and Mutual Fund

Now let’s compare SIP and mutual funds on various aspects:

Criteria	SIP (Systematic Investment Plan)	Mutual Fund
Definition	A disciplined way to invest in mutual funds is by contributing a fixed amount at regular intervals.	A pool of funds collected from investors for investment in stocks, bonds, or other assets.
Investment Frequency	Regular, fixed investments (monthly, quarterly, etc.).	Lump sum or through SIP (as a mode of investment).
Minimum Investment	As low as ₹500 per month (varies by fund).	Varies by fund; often requires a lump sum investment.
Risk Exposure	Spread over time, reducing market timing risks.	Risk depends on the type of mutual fund (equity, debt, etc.).
Investment Horizon	Suitable for long-term goals (5+ years).	Suitable for both short-term and long-term investments.
Return Potential	Potential returns depend on the market performance over time.	Potential returns vary based on the type of mutual fund and market conditions.
Flexibility	Highly flexible; you can stop or increase the SIP anytime.	Less flexible if investing through a lump sum; SIPs allow regular investments.
Taxation	Same tax treatment as mutual funds; long-term capital gains (LTCG) or short-term capital gains (STCG).	Tax treatment depends on the fund type and investment duration.
Goal	To invest small amounts regularly to build wealth over time.	To pool money for various investment objectives, including growth, income, etc.
Ideal For	Beginner investors who want to invest systematically and benefit from rupee cost averaging.	Investors who prefer lump-sum investments or who want exposure to specific sectors.

Returns

SIP returns are dependent on the type of mutual fund scheme you invest in – equity, debt or hybrid. Depending on your risk appetite and investment horizon, you can choose suitable schemes for your SIPs.

Mutual funds also provide varied returns based on their underlying assets. Equity funds tend to provide inflation-beating returns over the long run but can be very volatile in the short term.

Overall, mutual funds offer the benefit of professional management of money across assets, while SIPs make investing easier through smaller periodic investments.

Liquidity

One of the biggest advantages of SIPs is that they allow easy exit – you can simply stop the auto-debit to your account anytime. Most funds also allow you to temporarily pause SIPs or withdraw money from your investments anytime without penalties.

Some mutual funds, however, have lock-in requirements, so your money is not freely accessible for that period.

So, SIPs score higher in terms of providing better flexibility and liquidity.

Costs

The key costs involved in both include:

SIP

• Fund management charges
• Transaction costs

Mutual Fund

• Fund management charges
• Transaction costs
• Brokerage fees
• Exit load in case of premature withdrawal

So, mutual funds tend to have higher costs. The exit load for redeeming units early also reduces returns. SIPs allow long-term investing without having to worry about withdrawal penalties.

Ease of Investment

The entire SIP process, from signing up to tracking investment, is fully digitised through online platforms and apps. You can set up SIPs quickly in a paperless manner and automate your contributions for seamless investing.

While many mutual funds also offer online investment options now, the traditional process often requires physical document submissions and complex paperwork. So, SIPs provide a simpler process.

Conclusion

In summary, SIPs make regular investing easy through auto-debits and provide flexibility of entry/exit. Mutual funds manage pooled money across a variety of assets but may have exit barriers and higher costs.

In addition, if you need immediate liquidity but wish to continue holding your mutual fund investments, you can consider a Fibe Loan Against Mutual Funds. This loan provides a hassle-free way to access up to ₹10 lakhs* instantly by pledging your mutual fund units as collateral. You only need to pay the interest for what you use and enjoy a processing fee of ₹399 or 1.5% of the loan amount, whichever is higher. 

The loan also offers interest-only EMIs and disbursal in as little as 10 minutes, making it a quick and efficient option to meet urgent financial needs without having to liquidate your investments.

FAQs

For higher profits, which is better: mutual funds or SIP?

Returns depend more on the performance of the scheme you choose rather than on the investment method. SIPs help you invest regularly while mutual funds manage your money across assets. So they complement each other.

Can I withdraw SIP anytime?

Yes, the flexibility and liquidity of SIPs allow you to redeem your units anytime without exit loads.

Is SIP safer than a mutual fund?

SIP enables disciplined investing to reduce risk over the long term. Mutual fund risk varies by scheme – equity funds carry higher risk while debt funds are relatively safer.