SIP’s Vs Mutual Funds: Know the Difference

Investing is a powerful way to grow your wealth, but with numerous options available, it can be confusing for beginners. Two common terms you’ll often encounter in the world of investments are ‘SIP’ and ‘Mutual Funds’. While they are often thought of as synonymous, there exist fundamental differences in their approach to investment. Let’s break down these key differences between SIPs and mutual funds so that, as an investor, you can make more informed investment decisions.

Understanding Mutual Funds and the Magic of Diversifying 

Mutual funds are investment vehicles that pool money from multiple investors to purchase a diversified portfolio of stocks, bonds, or other securities. They are managed by professional fund managers who make investment decisions on behalf of the investors. When you invest in a mutual fund, you receive units or shares of the fund proportionate to your investment amount. The value of these units fluctuates with the performance of the underlying assets.

  • Fund Type: Mutual funds come in various types, including equity funds, debt funds, hybrid funds, and more. Each type has a different investment objective and asset allocation strategy.
  • Fund Manager: Mutual funds are managed by professional fund managers or investment teams responsible for making investment decisions and managing the fund’s portfolio.
  • Net Asset Value (NAV): NAV represents the per-unit market value of a mutual fund scheme. It is calculated by dividing the total value of the fund’s assets by the number of outstanding units.
  • Portfolio Holdings: Mutual funds disclose their portfolio holdings regularly. These holdings show the assets the fund is invested in, including stocks, bonds, or other securities.
  • Expense Ratio: The expense ratio is the annual fee charged by the mutual fund for management, administration, and other expenses. It is expressed as a percentage of the fund’s assets under management (AUM).
  • Load Fees: Some mutual funds charge load fees, which are either front-end (charged when you buy units) or back-end (charged when you sell units). No-load funds do not charge these fees.
  • Dividends and Capital Gains: Mutual funds may distribute dividends or capital gains to investors based on the fund’s performance. These can be reinvested or paid out in cash.
  • Risk Profile: Each mutual fund has a risk profile that reflects the level of risk associated with its underlying investments. This profile helps investors assess the fund’s suitability.

Understanding SIPs and the Importance of Discipline

SIP, on the other hand, is an investment strategy rather than a standalone investment product. It is a way to invest in mutual funds systematically and regularly. Instead of making a lump-sum investment, as you would with a traditional mutual fund purchase, SIP allows you to invest a fixed amount of money at regular intervals, usually monthly.

  • Regular Contributions: SIP involves making regular and fixed contributions to your chosen mutual fund scheme. Typically, these contributions are made on a monthly basis.
  • Fixed Amount: You determine the fixed amount you want to invest in your SIP each month. This amount remains constant, promoting consistency in your investments.
  • Frequency: SIP allows for flexibility in the frequency of contributions. While monthly contributions are common, some SIPs offer quarterly or even weekly investment options.
  • Rupee Cost Averaging: SIP promotes rupee cost averaging. When markets are up, your fixed amount buys fewer units, and when markets are down, it buys more units. Over time, this can reduce the average cost per unit.
  • Duration: You can choose the duration for which you want to continue your SIP investments. This can range from a few months to several years, depending on your financial goals.
  • Automation: SIPs can be automated, meaning the fixed contribution is deducted automatically from your bank account, reducing the need for manual intervention.
  • Flexibility: SIPs offer flexibility in terms of investment amount and tenure, making them accessible to a wide range of investors.
  • Liquidity: While SIPs are meant for long-term investing, you can typically pause or stop them at any time without incurring significant penalties.
  • Tax Benefits: Certain SIPs, such as Equity-Linked Saving Schemes (ELSS), offer tax benefits under Section 80C of the Income Tax Act in India.
  • Diversification: SIPs can provide diversified exposure to various asset classes, including equities, debt, or hybrid funds, depending on your choice of mutual fund scheme.

Major Differences Between SIP and Mutual Funds

Now that you know the detailed functions of mutual funds and SIPs, it is time to find out what are the differences that make them unique:

FeatureMutual FundSIP
DefinitionInvestment vehicle that pools money from investors and invests it in a diversified portfolio of assets Investment technique that involves making regular fixed payments
Investment amountCan be a lump sum or regular payments.Regular payments.
Investment flexibilityCan be invested in at any time.Must be invested in at regular intervals, such as monthly, quarterly, or annually.
RiskVaries depending on the type of mutual fund. Equity funds are generally riskier than debt funds.Varies depending on the type of mutual fund, but generally lower than lump sum investing due to rupee cost averaging.
SuitabilitySuitable for investors with any risk appetite and investment horizon.Suitable for those who want to invest regularly in a disciplined manner and benefit from rupee cost averaging.

The Collective Power of Mutual Funds and SIPs

As useful and ingenious as the individual concepts of SIPs and mutual funds are, they can be combined to create a whole that is multitudes more than the sum of their parts. This strategy can be a savvy strategy for investors looking to achieve their financial goals. The collective power of mutual funds and SIPs lies in their ability to offer investors a diversified and professionally managed investment portfolio. 

Mutual funds pool resources from multiple investors and employ expert fund managers to make informed investment decisions. SIPs, in turn, facilitate regular and disciplined contributions, harnessing the benefits of rupee cost averaging and promoting a savings habit. Together, mutual fund SIPs offer a pathway to long-term wealth creation while mitigating risks and providing tax advantages. The convenience of automation and the flexibility to start with small investments make this combination accessible to a wide range of investors, helping them achieve their financial goals effectively.

Key Takeaways

Investing offers a path to financial growth, but navigating the myriad options can be bewildering. Two common terms, ‘SIP’ and ‘Mutual Funds,’ often confound beginners. Mutual funds pool investments from multiple sources to create a diversified portfolio, expertly managed by fund managers. In contrast, SIP is a strategy to invest systematically and regularly in mutual funds. SIPs entail making fixed monthly contributions and fostering disciplined saving. This dynamic duo offers a systematic, diversified, and tax-efficient approach to wealth creation. Their power lies in automation, flexibility, and affordability, making them accessible to all investors seeking long-term financial goals.


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Amit Arora

I am a seasoned retail banker with over 21 years of global experience across business, risk and digital. In my last assignment as Global Head Digital Capabilities, I drove the largest change initiative in the bank to deliver the end-to-end digital program with over US$1 billion in planned investment. Prior to that, as COO for Group Retail Products & Digital, I implemented a risk management framework for retail banking across the group.
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