Mutual Funds vs SIPs. Difference between Mutual Fund and Systematic Investment Plan (SIP). Which is better?

Mutual Funds vs SIPs. Difference between Mutual Fund and Systematic Investment Plan (SIP). Which is a better investment option?

Both Mutual Funds as well as Systematic investment plan (SIP) are investment instruments. Both are ideal for long term investment and suit small investor needs. Mutual Fund is market investment alone while Systematic investment plan (SIP) is a combination of market investment and saving plan

SIP= Market investment + Savings Plan

Mutual Fund invests money indirectly in a variety of capital instruments like stocks, bonds etc. Through Systematic investment plan(SIP), one can invest in Mutual Funds. You will invest the same amount of money at regular time period when you enroll for SIPs.

Returns: You earn fixed returns in case of SIPs. The money that you earn is reinvested again and your fund value grows through the process of Compounding. Suppose you invest Rs 20,000 in a SIP that gives returns of 10% per year. You will earn a return of Rs 2000 on the principal invested i.e Rs 20,000. In the second year, the return of Rs 2000 will be added to the principal of Rs 20000, making it Rs 22,000. This process will go on thereby providing the benefit of compounding

In case of Mutual Funds, returns are not fixed. They are dependent on the market situation. However, the returns are higher when compared to SIPs. There are many good performing Mutual funds, which offer a return of 20% each year.

Risk: As stated above, SIPs are safe when compared to Mutual Funds since they are not dependent on the market situation. On the other hand, if the market situation is not good and stocks are witnessing depreciation, your mutual fund may also get affected.

Bottom line: SIPS are risk-free. Mutual Funds offer higher returns

As such, Mutual funds are suitable for people who are willing to take risks and obtain greater returns. On the other hand, SIPs are suitable for people who want to play safe and diversify their investment portfolio.

To know more about Mutual funds and SIPs, you could go through the below hubs written by myself