Mutual funds are often described as a basket of stocks or bonds, depending on the fund's investment objectives, managed by a professional with shares of the portfolio made available for purchase by investors. At the end of each trading day, all the fund's holdings are priced and the fund's net asset value is calculated. Purchases of mutual funds can be made with lump-sum investments or through a systematic investment plan (SIP).
Key Takeaways
- A systematic investment plan involves investing a consistent sum of money regularly, and usually into the same security, which could be a mutual fund or funds.
- A SIP generally pulls automatic withdrawals from the funding account and may require extended commitments from the investor.
- SIPs operate on the principle of dollar-cost averaging, buying more shares when prices dip.
- Mostmutual fund companies offer SIPs.
Mutual Funds
Mutual funds are investment vehicles that pool money from many investors and then put that money to use following a stated strategy. For example, one mutual fund may be interested in generating extra returns by identifying under-valued small-cap stocks with high growth potential by undertaking in-depth research. Another mutual fund may instead seek to simply replicate the S&P 500 index in a passive manner. Either way, mutual funds allow investors to get professional money management across a range of strategies and investment styles.
Buying mutual fund shares can be done as a one-off transaction, or investors can choose to accumulate more mutual funds shares over time. Thus, we turn to systematic investment plans as a way to accomplish the latter.
SIP Plans
A systematic investment plan (SIP) is a plan where investors make regular, equal payments into a mutual fund,trading account, or retirement account such as a 401(k).
An SIP involves an investor contributing a set dollar amount on a regularly scheduled basis. For example, you might set up a SIP to buy $100 per month worth of ABCDX mutual fund. Each month, on the specified date, you would have that buy order executed. This way of investing offers two key advantages: easy saving and buying shares consistently even when the markets are down - enabling better prices on average.
Setting up an SIP make it easier to budget for retirement and other investment goals. When you work a small amount into a monthly budget, it becomes more likely that you stick with the plan, making it easier to achieve your investment goals. For example, it is relatively easy to commit to investing $100 per month for retirement savings, but coming up with $1,200 at one time may be more difficult.
Through buying shares of a mutual fund on a regular basis, you can reduce the average cost per share. Market fluctuations over time are likely to present opportunities where shares are purchased at a lower price. This technique, called dollar-cost averaging, is a widely used strategy by many investors and is recommended by financial advisors.
What the Experts Have to Say:
Advisor Insight
Dan Stewart, CFA®
Revere Asset Management, Dallas, TX
A systematic investment plan, or SIP, simply means making periodic and scheduled contributions to your investment account or a specific security. Dollar-cost averaging is a SIP in its simplest form.
For example, investing $500 per month total in two different mutual funds of $250 each would be a SIP. But a SIP is not an investment strategy like a mutual fund. A mutual fund is a professionally managed fund in which the manager invests according to the fund's prospectus.
While the SIP is a great way to invest when growing your assets, once you accumulate a decent amount of wealth and are, say, nearing retirement, you may want to consider some type of defensive strategy that involves more active management.
FAQs
SIP is the short form of systematic investment plan. While mutual fund is an investment product or instrument, SIP is a method of investing in mutual funds. As the name suggests, through a mutual fund SIP you can invest systematically over a period of time and create a corpus to meet your different financial goals.
How is SIP different from mutual fund? ›
SIP is a disciplined way to invest in mutual funds with fixed instalments, while a mutual fund is the actual investment option you choose. A systematic investment plan (SIP) is a method of investing in mutual funds, where a fixed amount is invested at regular intervals.
What is the difference between STP and SIP in mutual funds? ›
In a nutshell, SIP refers to a systematic way of investing in Mutual Funds, whereas STP refers to a systematic transfer of funds from one Mutual Fund plan to another. Finally, SWP refers to the systematic withdrawal of money or redemption of Mutual Fund units.
What is the difference between SIP and direct mutual fund? ›
In mutual funds, the charges incurred by way of the fund manager's fees and the transaction value is on the higher side, while in SIP, the investment value and the trade value are always on the lower side.
What is the difference between SIP and one time mutual fund? ›
As SIP involves buying Mutual Fund units during the different market cycles, the cost per unit is averaged out over the investment tenure. Lumpsum investment is a one-time transaction. The price of the Mutual Fund units will depend on the market cycle. The cost per unit, therefore, is not averaged out.
What are the disadvantages of a SIP? ›
Disadvantages of Systematic Investment Plan
- Market Risk:
- Possibility of Missing Gains:
- Over dependence on Fund Manager:
- Limited Control:
- Exit Load and Lock-in Periods:
- Expense Ratios:
In conclusion, investing in Stock SIPs has higher potential returns but also higher risk. Mutual Fund SIPs offer diversification and lower risk through professional management. Mutual Fund SIPs are less risky than Stock SIPs. Returns may be lower in Mutual Fund SIPs, and you need to stay invested for a set time.
Is SIP a good choice? ›
SIPs are generally considered safe as they allow for disciplined investing in mutual funds, but they are subject to market risks. Is SIP better than FD? SIPs offer the potential for higher returns over the long term compared to FDs, which typically offer fixed returns but lower potential growth.
What are the disadvantages of STP in mutual funds? ›
The investor is also liable to taxations on the returns gained on STP since it is nothing but mutual fund gains only. The short term capital gains or STCG are taxed at 15% whereas the long term capital gains or LTCG are tax-free up to ₹1 lakh, above which a 10% tax is levied as on 2023.
Is a systematic transfer plan good? ›
It is a plan that allows you to transfer funds from one asset to another in order to reduce the risk of losses in one asset. A Systematic Transfer Plan can help you reduce your risk and improve the stability of your portfolio. It can also help you grow your wealth by investing only in low-risk assets.
- Best SIP Plans for INR 1000 Investment Per Month.
- ICICI Prudential BHARAT 22 FOF - Direct Plan.
- Motilal Oswal Midcap Fund - Direct Plan.
- Bank of India Small Cap Fund - Direct Plan.
- Quant Small Cap Fund - Direct Plan.
- Mirae Asset Great Consumer Fund - Direct Growth.
- Mahindra Manulife Focused Fund - Regular Growth.
Equity Hybrid Debt Solution Oriented Others Filter
| Scheme Name | Plan | 10Y |
|---|
| Tata Large Cap Fund - Direct Plan - Growth | Direct Plan | 145.05% |
| Mirae Asset Large Cap Fund - Direct Plan - Growth | Direct Plan | 145.68% |
| Taurus Large Cap Fund - Direct Plan - Growth | Direct Plan | 111.19% |
| Axis Bluechip Fund - Direct Plan - Growth | Direct Plan | 135.42% |
29 more rowsIs SIP 100% safe? While SIPs are relatively safer than some investment options, they are not completely risk-free. The risk is associated with market fluctuations, and returns are subject to the performance of the underlying funds.
What is the difference between SIP and mutual? ›
SIP is the short form of systematic investment plan. While mutual fund is an investment product or instrument, SIP is a method of investing in mutual funds. As the name suggests, through a mutual fund SIP you can invest systematically over a period of time and create a corpus to meet your different financial goals.
What is a SIP in a mutual fund? ›
A Systematic Investment Plan (SIP) is an investment tool which allows the investor to invest a fixed amount at regular intervals in a Mutual Fund scheme. SIP works by investing a fixed amount at a defined frequency.
What is the difference between SIP and term plan? ›
SIP allows you to purchase additional units of a scheme at NAV based prices by investing a fixed amount every month. It inculcates the habit of disciplined investing for long-term wealth creation. Term insurance is a type of life insurance that provides coverage for a specific period of time or years, i.e., a term.
How risky is SIP investment? ›
Liquidity risk: SIPs in funds whose units are difficult to redeem may pose liquidity issues. If it is not easy to sell the mutual fund units, you may be unable to access your capital quickly. Credit risk: For SIPs in debt funds, there is a risk that a bond issuer may fail to repay the debt.
Is SIP nothing but mutual funds? ›
Understanding SIP
A Systematic Investment Plan (SIP) is a strategic approach to investing in Mutual Funds, emphasising on regularity and discipline. Instead of a lump sum investment, SIP enables investors to contribute a predetermined amount at regular intervals - typically monthly or quarterly.
Can I withdraw SIP anytime? ›
Can You Withdraw SIP Anytime? Yes, you can withdraw your SIP amount before maturity. However, withdrawing early might incur exit loads, especially if done within a year. Check the specific terms of your mutual fund for any charges.
