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Difference between SIP and Mutual Fund

Posted on 22-Mar-2024

6 min read

SIP and mutual funds are terms that are often used interchangeably due to lack of clarity. Keep reading this article to learn about the difference between SIP and mutual funds work and how they work to build your wealth.

Table of Content

Confused by investment terms like SIP and mutual funds? You're not alone! While both are crucial to grow your wealth, understanding their key differences is crucial. To begin with, SIP, or Systematic Investment Plan, is an instrument that invests in mutual funds for long-term or short-term wealth creation. 

To provide you with more insights into these two terms, we will cut through the jargon in this blog, offering a crisp explanation of the difference between SIP and mutual funds.

What is a Mutual Fund?

A mutual fund is an investment vehicle that pools money from various investors to purchase a diversified portfolio of stocks, bonds, or other securities. Each investor holds shares, representing a part of the fund’s assets.

Managed by professional fund managers, mutual funds offer an easy and effective way for you to participate in the financial markets. With the power of diversification and expert management, mutual funds can be a crucial component in achieving your financial goals.

Example of a Mutual Fund

Imagine a mutual fund as a large basket. This basket is filled with various investments - like stocks, bonds, and other assets. Each investor purchases a share of this basket, meaning they own a small part of everything. 

As an investor, when you buy a share of a mutual fund, you're essentially buying a small piece of each stock that the fund owns. If these stocks do well, the value of your share goes up. Conversely, if the stocks don’t perform well, the value of your share goes down.

What is an SIP?

SIP, or Systematic Investment Plan, is a method of investing in mutual funds. It allows you to invest a fixed amount of money regularly, say monthly or quarterly, into a chosen mutual fund scheme. This disciplined approach not only inculcates a habit of regular saving but also benefits from the power of compounding and rupee cost averaging. SIP is an excellent tool for investors who wish to build wealth over a long period without the stress of timing the market.

Example of an SIP

Now, let’s understand SIP with an example. Think of SIP as a recurring subscription to a mutual fund. Suppose you set up an SIP in a mutual fund. Every month, a fixed amount, say Rs. 1,000, is automatically invested in this fund. This investment of Rs. 1,000 buys you a certain number of fund shares, depending on the fund’s current price. If the price is high, you get fewer shares, and if the price is low, you get more shares. 

Over time, this strategy averages out the cost of your investment and can potentially lead to better returns than investing a lump sum in one go. SIPs are ideal for those who wish to invest regularly and build their investment over time without worrying about the right time to invest.

Key Differences Between SIP and Mutual Funds

Exploring the differences between mutual funds and SIPs is crucial for investors to make informed decisions. While they're often used together, they serve distinct roles in the investment world. Let's dive into their key differences to understand how each can uniquely contribute to your financial goals.

Investment Vehicle vs Investment Strategy: The fundamental difference lies in their nature. A mutual fund is an actual investment product comprising a pool of funds invested in various securities. In contrast, an SIP is a strategy or a method to invest in these mutual funds. It's like comparing a car (mutual fund) with a driving technique (SIP).

Capital Requirement: SIPs are particularly advantageous for investors who may not have much money available upfront. With SIP, you can start investing with as little as a few hundred rupees. On the other hand, a lump sum investment in mutual funds typically requires a more significant amount of capital.

Risk and Market Timing: SIPs inherently reduce the risk associated with market timing. By investing a fixed amount regularly, you purchase more units when the market is low and fewer units when the market is high, averaging out the investment cost over time. This strategy, known as rupee cost averaging, is a crucial benefit of SIPs. In contrast, lump-sum investments in mutual funds can be more susceptible to market timing risks.

Investment Flexibility: Mutual funds offer a more comprehensive range of investment options, including different types of funds based on asset class, investment strategy, and risk profile. SIPs, being a method of investment, are limited to the regularity and amount of investment but offer the flexibility to choose across various mutual fund schemes.

Financial Discipline and Long-Term Wealth Creation: SIPs encourage regular saving habits and long-term investment discipline. This approach benefits investors looking to build wealth over time, as it leverages the power of compounding. When invested in a lump sum, mutual funds require a disciplined approach to timing and investment amount.

SIP vs Lumpsum Mutual Funds – Which is Better for You?

Understanding the difference between SIP and mutual funds is key to tailoring your investment strategy to your personal financial goals. Here is a guide to help you choose which option works best for you:
  • If you have a lump sum amount and want to invest it immediately, and you are comfortable with market volatility, lump sum investment might be suitable.
  • If you prefer a disciplined approach, want to mitigate market risk, and have a regular income, SIP might be better.

Some investors also opt for a combination of both SIP and lump sum investments to balance out the advantages of both approaches. Consulting with a financial advisor who understands your financial goals and risk profile can help you make an informed decision.


Understanding the disparity between SIPs and mutual funds is essential for informed investment decisions. While mutual funds serve as investment vehicles diversified across securities, SIPs represent a strategy for consistent investment. 

SIPs offer lower entry barriers and mitigate market timing risks through rupee cost averaging. Conversely, lump-sum mutual fund investments require higher capital and disciplined market timing. Tailoring your approach to your financial goals, risk tolerance, and income stability is paramount, possibly necessitating a blend of SIPs and lump-sum investments.


Here are the answers to some of the commonly asked questions about SIPs and mutual funds:

Q: Can I switch from SIP to lump sum in mutual funds at any time?

Yes, you have the flexibility to switch between SIP and lump sum investments in mutual funds. This decision should be based on your financial goals, market conditions, and investment strategy. It's always advisable to consult with a financial advisor before making such changes.

Q: Is SIP a safer investment option than a lump sum in mutual funds?

While no investment is entirely risk-free, SIPs offer a more disciplined approach that can mitigate some risks associated with market volatility. By investing smaller amounts regularly, you benefit from rupee cost averaging, which can potentially reduce the impact of market fluctuations on your investment.

Q: How does SIP help in managing market fluctuations effectively?

SIPs help manage market fluctuations through the principle of rupee cost averaging. This approach means you invest a fixed amount at regular intervals, buying more units when prices are low and fewer units when prices are high. Over time, this averages out the cost of your investment, potentially reducing the risk and impact of market volatility.

Q: Can amateur investors start with an SIP?

Absolutely. SIPs are an excellent starting point for beginners due to their simplicity and low entry barrier. You can start with a relatively small amount and gradually increase your investment as you become more comfortable and knowledgeable about the market.

Q: What should be the ideal duration for a SIP investment?

The ideal duration for an SIP investment varies depending on your financial goals and investment horizon. Typically, a longer-term SIP is recommended to fully leverage the benefits of compounding and rupee cost averaging.

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