SIP isn't an investment; mutual fund is!
You do not invest in a SIP. You invest via SIP in a mutual fund. Look at it this way. When you order food from an online portal, the food itself is your purchase. UPI, card, or cash are just different means of payment.
Likewise, the mutual fund is also an investment. The SIP is just one form of making that particular investment. Once this is clear, most of the confusion ends.
Imagine that you have decided on which mutual fund you wish to invest in. The next question is a very basic one. How do you want to invest? Here you have two options.
One way is to make a lump-sum payment of ₹1 lakh in one go. The other way is to make a periodic investment of ₹5,000 every month for several months to come.
The second method is known as SIP. This is what SIP is all about. SIP does not alter the destination of your funds. It only alters the way your money goes into the mutual fund.
On the other hand, mutual funds refer to financial products that gather capital from thousands of investors. The capital gathered is invested into different types of assets like stocks, bonds, government securities, gold, among others, based on the kind of mutual fund.
Fund managers do the research work for you. Their task is to manage and build the portfolio of the fund as per its objective.
This means there are three significant benefits for you. Firstly, your money becomes diversified, rather than being invested in one company only. Secondly, you do not have to analyse all market moves by yourself. The third advantage is accessibility, which makes it possible for even smaller investors to invest in the markets, which normally would need huge amounts of money and extensive research.
This is the reason why mutual funds became one of the most preferred methods of investing in wealth creation.
Why SIP is so popular
The popularity of SIP has increased due to its simplicity. You need not have a lot of money to begin, and the whole thing becomes automatic after some initial setting. This helps in being more disciplined.
The other advantage of SIP is that it minimises the risks involved with timing the market. Since you are investing at fixed intervals, you get to purchase units at various market levels. This may help in averaging the cost of purchase. It is because of these reasons that many financial planners advise SIP for long-term goals.
It also helps in salary-linked investments. If your money comes in on a monthly basis, then SIP matches the investment with your cash flow. This helps you build up your portfolio without affecting your liquidity.
Choosing the right mutual fund matters more
Although SIP is quite handy, the actual investment decision will remain the selection of the mutual fund scheme. One needs to select the correct mutual fund based on one's objective, risk, and time horizon. The ideal SIP in a bad mutual fund will not prove beneficial.
For instance, in case one's objective is wealth generation in the long run, one may prefer an equity mutual fund. In case of low-risk preference, one may go for a debt or hybrid mutual fund. Thus, before choosing SIP, one must have proper knowledge regarding the mutual fund.
SIP vs mutual fund in one view
Below is a quick comparison between SIP and Mutual funds.
This is the most straightforward manner in which you can interpret the difference between SIP and mutual fund.
Final thoughts
There's been so much confusion about SIP and mutual funds because they have always been referred to as one entity. However, once you start differentiating between the investment and the way of making the investment, things start to make more sense.
One quote that stands out is as follows:
You don't make investments in SIP; you make investments in mutual funds through the SIP route. Once you know the difference between SIP and Mutual funds, you're already halfway through being a savvy investor.
