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.
What is the difference between SIP investment and 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 systematic equity plan and SIP? ›
SIPs in equities funds and for a longer time horizon are preferred by most investors. STP involves investing a lump sum of money in a mutual fund scheme first (usually a debt fund). In the equity model, this money is transferred at regular periods. Even in this case, the amount of transfer and tenure is set in stone.
What is the difference between SIP and mutual fund and ELSS? ›
SIP vs ELSS – Quick Summary
SIP is an investment mode to invest in mutual funds through the regular installment with an amount as low as ₹500. ELSS is an open-ended equity mutual fund that provides the benefits of tax savings on the invested amount and has a lock-in period of 3 years.
What is downside in SIP? ›
Returns could be lower than lump sum investments. One downside is that returns may be lower compared to lump-sum investments during bull markets when stock prices are consistently rising. Additionally, SIP does not guarantee profits, and your investments are still subject to market risks.
What are the disadvantages of SIP investment? ›
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:
Systematic Investment Plan (SIP) is an investment plan (methodology) offered by Mutual Funds wherein one could invest a fixed amount in a mutual fund scheme periodically, at fixed intervals – say once a month, instead of making a lump-sum investment. The SIP instalment amount could be as little as ₹500 per month.
Which SIP is best for $1000 per month? ›
Details of Best SIP Plans for 1000 per Month
- Kotak Life – Frontline Equity Fund. ...
- Bajaj Life – Accelerator Mid-cap Fund II. ...
- Bajaj Life – Pure Stock Fund. ...
- Quant Active Fund. ...
- Parag Parikh Flexi Cap Fund. ...
- Quant Focused Fund. ...
- Edelweiss Large & Mid Cap Fund. ...
- Kotak Equity Opportunities Fund.
Systematic Investment Plan (SIP) is a method of investing in Mutual Funds allowing investors to contribute a fixed sum regularly, like monthly or quarterly, rather than a lump sum. This, starting from as low as Rs. 100 per month, is same as a recurring deposit and is hassle-free with automated monthly deductions.
Is SIP tax-free? SIPs themselves are not tax-free, but they can be a powerful tax-saving tool. Here is why: SIPs are a way to invest in certain mutual funds, like Equity Linked Saving Schemes (ELSS).
Can we save tax on SIP? ›
With Systematic Investment Plan (SIP), you can save on your taxes and also get higher returns on your investment. Under Section 80(C) of the Income Tax Act, 1961, investing in Equity Linked Savings Scheme (ELSS) through SIP enables you to claim a deduction of Rs 1.5 lakh from your taxable income.
Are all SIP tax savings? ›
SIP under Equity Linked Saving Schemes (ELSS) comes under the EEE (Exempt, Exempt, Exempt) category. This means, the amount invested, the amount on maturity and the withdrawal amount all are tax-free.
Which is more profitable SIP or mutual fund? ›
The aim of the fund manager is to maximize the profit while keeping the risk factor at a minimum. One of the major benefits of investing in SIP is the power of compounding, where the interest earned on the principal value is reinvested. Over a period, investors yield a higher return of profit.
Is SIP safe or mutual fund? ›
SIPs promote regular investing and foster financial discipline over time. The benefit of rupee of cost averaging reduces the impact of market volatility for long-term investments. SIPs make mutual fund investments safe and affordable for retail investors as there is no need for a lump sum amount upfront.
Is SIP a mutual fund investment? ›
Systematic Investment Plan (SIP) is a method of investing in Mutual Funds allowing investors to contribute a fixed sum regularly, like monthly or quarterly, rather than a lump sum. This, starting from as low as Rs. 100 per month, is same as a recurring deposit and is hassle-free with automated monthly deductions.
Is it better to invest in SIP or stocks? ›
Conclusion. If you know how to research the right stocks and are confident in your skills, stock SIPs can be a good investment choice. However, if you are not quite familiar with the functioning of the stock market and don't know how to analyse stocks, mutual fund SIPs can be a better option.
