SIP vs Mutual Funds: Which one is better for you? All you need to know

Investing is an important step towards achieving your financial goals. Not just that, investing helps you create a corpus for a rainy day. There are various investment options these days, with SIP (Systematic Investment Plan) and mutual funds being among the most popular ones. As per data by the Reserve Bank of India (RBI), more than 81 lakh investor accounts were added in 2020 in mutual funds and the SIP saw almost 91.8 billion net flow in March 2021. But which is right for you? This question often arises because of extensive marketing campaigns like “Mutual Fund Sahi Hai, SIP Karo Mast Raho,”.

According to Sachin Jain, Managing Partner, Scripbox, many people have come to believe that SIP and mutual funds are the same when they are not.

What Is Mutual Fund?

A mutual fund is an investment vehicle that allows individuals to participate in various financial markets such as equities (stock market), debt (bond market), commodities, real estate, and even InVITs (Infrastructure Investment Trusts). 

“It is a broad subject with multiple categories like large-cap funds, debt funds, and gold funds, each managed by a dedicated team of fund managers and analysts under an Asset Management Company (AMC). The choice of fund depends on the investor’s risk appetite, time horizon, asset allocation strategy, and investment purpose,” Jain said.

What Is SIP?

SIP as a format is very similar to the traditional Recurring Deposit (RD). Just like in an RD, where a fixed amount is invested regularly to accumulate a lump sum over time, especially popular in earlier times when interest rates were high, SIP also involves a regular debit from your bank account into a selected investment scheme. 

“The process is automated and disciplined. You select a specific date, link your bank account, and specify the amount and duration (ranging from six months up to 30 years). The mutual fund company then automatically debits the amount on the chosen date and invests it in the scheme, allocating units accordingly. SIPs can be paused once during their tenure and can be stopped at any time,” he added.

Which One Is Better?

Mutual funds and SIPs are not comparable in terms of which is better. A mutual fund is a product or investment vehicle, while an SIP is the process or method of investing in it.

“The combination of both helps investors invest in a systematic and disciplined manner under professional fund management,” Jain concluded.