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Investors are always on the lookout for better investment options. The market offers a variety of choices, including hedge funds, Systematic Withdrawal Plans (SWP), Unit Linked Insurance Plans (ULIP), and Equity Linked Saving Schemes (ELSS).
Among these, Mutual Funds and Systematic Investment Plans (SIP) stand out as the most popular. In 2020, over 81 lakh new investor accounts were added to mutual funds, and in March 2021, the net SIP inflow reached ₹91.8 billion, according to RBI data.
Investors often prefer to increase returns without constantly monitoring their portfolios or trading in the market. This is where fund managers come in, using their professional expertise to manage investments on behalf of investors, aiming to maximize profits while minimizing risks.
While both mutual funds and SIPs involve investing in the stock market, there are key differences between them. Here’s a closer look at what each term means and how they differ:
Mutual Funds
Mutual funds are investments where an authorized fund house, like banks or asset management companies, pools money from investors and trades in various securities to maximize returns while minimizing risk. The diversification across different assets helps reduce market risks, as losses in one asset can be offset by gains in another. Typically, mutual funds involve lump-sum investments and offer various options like small-cap, mid-cap, large-cap funds, and index funds.
SIP
SIPs are similar to mutual funds, but they involve small, recurring investments instead of a one-time lump-sum payment. With a minimum investment of ₹500 per month or quarter, investors can gradually build their portfolio. SIPs also benefit from the power of compounding, where the interest earned is reinvested, leading to higher returns over time.
Key Differences Between Mutual Funds and SIP
- Investment Value: Mutual funds generally require a lump-sum investment, while SIPs allow for smaller, regular contributions.
- Market Volatility: Mutual funds are more impacted by market fluctuations due to the larger investment amounts compared to SIPs.
- Charges: Mutual funds typically incur higher fees, including Annual Maintenance Charges (AMC) and transaction costs, whereas SIPs have lower associated costs.
- Redemption: Both SIPs and mutual funds offer liquidity, but redemption charges are usually higher for mutual funds.
In summary, Mutual Funds provide a broad investment vehicle, while SIPs offer a structured way to invest in them. Though both are subject to market risks, they also offer tax benefits under Section 80C of the Income Tax Act, allowing investors to claim exemptions up to ₹1,50,000.
