"How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case." — Robert G. Allen
In recent years, retail investors have shown increasing interest in Systematic Investment Plans (SIPs) as an alternative to traditional mutual funds for investing in the stock markets. But what exactly are SIPs, and how do they differ from mutual funds? Let's break it down:
What are SIPs?
A SIP or Systematic Investment Plan refers to periodic investments of a fixed pre-determined amount into a mutual fund scheme. SIPs allow investors to invest small amounts regularly, like Rs. 500 or Rs. 1000 per month, to buy units of a mutual fund over time. The key benefits of SIPs are rupee cost averaging and compounding returns.
What are Mutual Funds?
A mutual fund is a professionally managed investment scheme that pools money from investors to invest in various asset classes like stocks, bonds, etc. Based on the fund's objective, a fund manager invests the capital and tries to generate returns. The key aspects of mutual funds are diversification, professional management, flexibility to enter/exit, and potential to earn higher risk-adjusted returns.
Investment Amount
SIPs allow small periodic investments whereas mutual funds require a larger lumpsum investment.
Ownership
In SIPs, the investor directly owns the mutual fund units. In a mutual fund, the units are owned by the fund house.
Costs
SIPs have lower costs compared to regular mutual funds. The investor only pays the underlying mutual fund costs.
Investment Approach
SIPs follow a passive approach with fixed periodic investments. Mutual funds are actively managed by a fund manager.
Risk Management
SIPs reduce risk through rupee cost averaging. Mutual funds reduce risk through portfolio diversification.
Liquidity
SIPs offer better liquidity as redemptions are easy. Mutual funds have comparatively lower liquidity.