A mutual fund is a type of financial instrument that collects money from thousands or even millions of investors and invests it in stocks, bonds, gold, or real estate. In order to reduce their exposure to risk, many investors seek to diversify their holdings. However, most individual investors are unable to pay the charges and fees required to hold sizeable positions in a variety of different assets. Thankfully, they can benefit from mutual funds. Mutual funds have a variety of advantages, but it’s important to consider the drawbacks as well as your own requirements, objectives, and risk tolerance before investing. But before investing you must know the difference between FMP and SIP.
Mutual funds are financial entities that combine capital from a variety of participants to boost purchasing power and diversify assets. In comparison to buying each item separately, this enables investors to add a sizable number of securities to their portfolio at a significantly reduced cost. Here we will try to explain to you the difference between FMP and SIP.
Table of Contents
Fixed Maturity Plan (FMP)
Plans with a fixed maturity carry more risk but provide better rewards. FMP is a mutual fund’s equivalent of a bank FD, however, unlike FDs, it cannot provide a set return. The returns on the FMP are, however, locked by nature because all investments are kept until maturity.
An FMP’s main goals are to create income and guard against capital fluctuations brought on by changing interest rates. The FMP is available in a variety of maturities, including 1 month, 3 months, 6 months, 1 year, and 3 years. The various maturities give investors the option to select an FMP in accordance with their investment horizon.
In comparison to an FD, an investor can earn 42% more. The FMPs are best suited for investors looking for risk-free investment opportunities, particularly those in the tax level above 20%. FMPs held for a minimum of 36 months and longer are a great option for long-term investors who:
- Need for financial safety
- Desire to take on as little market risk as possible
- Want to set up money for the future
- Wishing to gain from double indexation
- Get a consistent return on your investment
Systematic Investment Plan (SIP)
A wise way to invest is with a systemic investment strategy. Through tiny investments, this investment strategy generates bigger wealth. A Systematic Investment Plan (SIP) is a choice in which you put a set sum of money into a mutual fund on a regular basis. Either monthly or quarterly is possible.
How to start a Systematic Investment Plan
Postdated checks or an automatic withdrawal from your bank account in the amount of your choice are also acceptable forms of payment (minimum of Rs. 500 and in multiples of Rs. 100). You are free to invest for as little as six months or as long as you like. SIPs are currently available on the first, seventh, tenth, twentieth, and twenty-fifth of each month.
How do SIP works?
A SIP is a simple and adaptable investment strategy. Your funds are automatically taken out of your bank account and invested in a certain mutual fund plan. You are given a specific number of units based on the current market rate (also known as the day’s NAV, or net asset value).
Each time you make an investment, more units of the scheme are added to your account at the going rate. As a result, investors can take advantage of rupee-cost averaging and the power of compounding by purchasing units at various prices.
Rupee-Cost Averaging
When you must enter the market, rupee-cost averaging enables you to forgo the guessing game. Being a consistent investor, you can get more units for your money when the price is low and less when the price is high. You might be able to attain a lower average cost per unit during periods of market volatility.
Power of Compounding
Compounding is a straightforward rule: the earlier you start investing, the more time your money has to increase. For instance, if you began investing Rs. 10,000 each month on your 40th birthday, you would have amassed Rs. 24 lakhs in 20 years. When you turn 60, your investment would be worth Rs. 52.4 lakhs if it increased by an average of 7% annually.
However, if you had started saving 10 years earlier, your monthly investment of Rs. 10,000 would have grown to Rs. 36 lakh in just 30 years. At age 60, you would have Rs. 1.22 Cr. if average annual growth remained at 7%.
Benefits of SIP
- Rupee Cost Averaging reduces risk, and SIPs can be started with relatively little capital.
- It is not required to time the market.
- SIP and long-term financial objectives can work together.
- A methodical approach to investing aids in emotional self-control.
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Frequently Asked Questions
1. What is the minimum and maximum amount of investment through the SIP?
There are several minimum investment requirements set by various mutual fund companies. However, an ELSS’s SIP minimum is Rs 500. However, the majority of businesses take SIPs of Rs 1000.
2. What should be the date of SIP investment in a month?
You have the freedom to decide when to make your monthly payments each month. But you are unable to select a date. The fund firms have established a few monthly SIP payment deadlines. Between those dates, you must decide.
3. SIP or lump sum, which method of investing gives a better return?
It’s a complicated question that depends on the state of the market. The SIP will perform better if the market experiences ups and downs because you will receive the mutual fund units at the average price. The SIP will lower the average purchase price even in a down market.
But a lump sum investment would yield superior returns in a market that is always rising. The greatest approach, which also lowers risk, is to accept an average return because you can’t foresee how the market will move.
4. Do mutual fund companies charge extra for the SIP facility?
No, mutual fund companies do not impose additional fees for SIPs.
5. What if I can’t pay SIP in a month?
The investment for that month will be lost to you. Next month, the mutual fund business will try once more. If you are unable to make payments for the second month in a row, your SIP will be closed.
The mutual fund companies don’t impose any penalties for missed SIP payments. Banks may, however, assess bounced check fees.
6. Can I prematurely close a SIP? Would there be any penalty?
Yes, a SIP can be closed at any time. There wouldn’t be any consequences.
7. Can I also deposit some lump sum amount in the SIP account?
You can, in fact, make a lump sum investment in the same mutual fund portfolio. In a mutual fund, each SIP installment is, in fact, a distinct investment.
8. Should I Stop SIP when the market falls?
Never expect to reap the rewards of averaging. If the market is falling, you should consider increasing your investment rather than stopping it.
9. What is the Appropriate time to start a SIP?
If you are considering the long term, any moment is suitable. The SIP with a 5 or 10-year tenure can begin at any time. The SIP itself is intended to lessen share market turbulence.
10. Will the units allotted to me will be the same every month?
No. The units cannot be the same because you invest the same amount each month and the mutual fund’s NAV charges. If the mutual fund scheme’s NAV decreases, you will receive more units.
11. Is SIP possible online?
Irrespective of your investment mode, SIP is a possibility. Through the online distributor’s portal and the website of the mutual fund company, SIPs can be opened online.
12. How can I reduce or increase the tenure of a SIP?
A SIP mandate is final once it has been issued. You should “stop and start afresh” to lengthen or shorten the tenure.
Also Read: Investing in Mutual Funds
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