Many of my friends have recently started investing in SIP. I also want to invest in it. But I don’t understand the difference between Mutual Fund and SIP. How does SIP work? – Prasad Raghav
Many people get confused between Systematic Investment Plan (SIP) and Mutual Funds. While Mutual Fund is an investment product, SIP is one of the methods of investing in Mutual Funds. So, when you invest through SIP, you are actually investing in a Mutual Fund.
Let’s understand in detail the difference between Mutual Fund and SIP. And how SIP helps you invest efficiently in Mutual Funds.
Difference Between Mutual Fund And SIP
A Mutual Fund is a professionally-managed investment scheme. The scheme is run by an asset management company (AMC) that pools in money from several investors like you to invest in stocks, bonds, gold, and other securities. So, Mutual Fund schemes are a financial product that aims to grow your money.
On the other hand, SIP is simply an investment technique. Through SIP, you can automatically invest a fixed sum of money at pre-specified time intervals.
Interestingly, the SIP investing strategy can apply universally across Mutual Funds, your public provident fund, fixed deposits, and even if you have to buy a 2-gram gold coin every month. It simply means investing a fixed sum of money to invest in an asset class at regular intervals.
Nevertheless, SIP is one of the most recommended ways of investing in Mutual Funds. Let us understand how SIPs work to get more clarity.
SIP In Mutual Funds – How They Work?
When starting investment through a Systematic Investment Plan, you need to decide on four things:
- The Mutual Fund scheme in which you want to invest
- The amount you want to invest
- The frequency of payments, i.e., weekly, monthly, quarterly, etc.
- And finally, the date on which that amount is to be deducted from your bank account
Once you are clear about these 4 aspects, you can start your SIP. For example, say you want to invest Rs. 10,000 a month on the first business day of every month in the Nippon India Growth Fund, a mid-cap fund.
|Decisions To Take Before Starting SIP|
|1||Fund||Nippon India Growth Fund – Direct|
|4||Start Day||1st Of Month|
Now, a sum of Rs. 10,000 will deduct from the bank account on the first working day of each month. Correspondingly, you will be allotted units in the Nippon India Growth Fund at the prevailing NAV (value of each Mutual Fund unit) on that day. And the process continues until you choose to terminate or put an end date to your Systematic Investment Plan.
|Investment Date||Amount Invested (Rs.)||Net Asset Value (NAV) (Rs.)||Units Allotted||Total Unit Balance|
|01 Apr 2021||10,000||1,675.2566||5.969||5.969|
|03 May 2021||10,000||1,681.2599||5.948||11.917|
|01 Jun 2021||10,000||1,773.1461||5.640||17.557|
|01 Jul 2021||10,000||1,873.2391||5.338||22.895|
|02 Aug 2021||10,000||2,039.0981||4.904||27.799|
|01 Sep 2021||10,000||2,075.0079||4.819||32.619|
|01 Oct 2021||10,000||2,178.4584||4.590||37.209|
As the table shows, the number of units allotted is a function of the scheme’s NAV on that date. So if the scheme’s NAV increases, you receive a lower number of units. And if the scheme’s NAV decreases, you receive a higher number of units.
Over time, you continue to accumulate units. Sometimes more number of units if there is a sharp correction, and sometimes less number of units if there is a sudden rally. This process of accumulating fewer and more units helps average the cost of acquiring the Mutual Fund units over the entire course of SIP. In fact, the disciplined technique of investing through SIP is among the best wealth-building tools for everyday investors, and here’s why.
SIPs often match our income cycle, and some part of the monthly salary can go towards investing. SIPs are automatic, which makes them the perfect antidote to the problem of people investing when markets are high and withdrawing money when markets are low.
Moreover, SIPs are flexible, as they help us do small accumulations and offer compounding advantages. And finally, the averaging function ensures that you don’t worry about when to enter and exit the market, which is somewhat of a massive benefit for any regular investor.
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