[Std-7]August Month Unit test Question Paper & Solution 2020
What is the Difference between SIP and Mutual Fund?
With increasing awareness amongst people for savings, it is high time that the myths concerning Systematic Investment Plan (SIP) investments are debunked. Investors often find themselves in a dilemma about whether to invest in SIP or mutual funds. Many investors often ask for the historical performance and guaranteed returns under SIP before committing an investment.
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The biggest misconception in the minds of investors is that besides mutual funds, SIP is an additional investment option for the investors. However, the investors must know that mutual fund is an investment product enabling investors to invest in a wide range of mutual fund schemes. As such, the investors may choose the desired mutual fund scheme, which best suits their investment plans and financial goals. On the other hand, SIP is not an investment product but a convenient option to invest in mutual funds.
One may invest in mutual funds in a lump sum or through SIP. Lumpsum investing refers to investing in one go, wherein the investor makes an investment with the mutual funds in a single instance. In contrast, SIP allows the investor to commit regular investments with mutual funds.
What is a SIP?
Once the SIP registration is completed in Mutual Fund’s records, and the NACH Mandate i.e. one time bank mandate is registered by investor’s bank the SIP Amount opted by the investors are automatically deducted from the investors bank accounts as per the interval opted by the investor and are invested in the specified mutual fund scheme.
SIP investing empowers the investors with the following benefits:
Rupee Cost Averaging
When one invests through SIP, it allows the investor to invest across market ups and downs. The investments are made at different levels across different periods. When the markets are rising, the portfolio valuation increases, thereby benefiting the investors. Similarly, when the markets are falling, the investors are allotted a higher number of units per SIP investment.
SIP enables investors to benefit from Rupee Cost Averaging. For example, if one has invested Rs. 10,000 as first SIP investment at Rs. 10 per unit, and then makes the next investment at NAV of Rs. 8.50 per unit, the cost of investment for allotted units under these two SIP instalments averages to Rs. 9.25 per unit.
Disciplined Way of Investing
With SIP registration, and the NACH Mandate authorized by investor’s bank the investments are automatically deducted from the investors bank accounts and made in the specified mutual fund scheme. As such, SIP investing inculcates a sense of financial discipline into investors' lives, as the investments are continued irrespective of market ups and downs. With consistent savings, the investors may steadily accumulate their savings and move towards their financial goals effortlessly.
Eliminating Investing Biases
The investment decisions are often clouded by several investing biases, including emotional bias and timing bias. The market ups and downs impact the decisions through fear and greed psychosis. When the markets are falling, the fear of markets correcting further keeps the investors away from the markets.
In contrast, it is often advisable that one must invest during the falling markets to benefit from lower valuations. Similarly, one also tends to wait for the right time to invest in the markets. Such procrastination is another primary reason for the investors delaying their financial plans. SIP eliminates the investors' emotional and timing bias since the amounts continue to be invested across market movements. Instead of waiting for the right time in the markets, the focus should be on 'time in the markets.'
Staggering the Investments over Period
This is another significant benefit that SIP investing allows to the investors. If one wishes to invest in their financial goals in a lump sum, the entire amount must be available upfront. This may not be possible since one tends to accumulate investment corpus towards his/ her financial goals with regular savings. On the other hand, SIP enables the investors to stagger the investments over a period and thus take baby steps in the investment journey. SIP investing is, therefore, best suited when the investors are having a regular and sustained flow of income.
With the above benefits, one may continue investing in mutual funds through SIP.
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