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Stock SIP vs Mutual Fund SIP: Which is more lucrative?

Systematic investment plan (SIP) investments offer very high returns in the long run. This is because the compounding effect (or The Eighth Wonder of the World, according to Albert Einstein) plays a crucial role in SIP investment. So, you must be wondering, ‘What is SIP investment?’ Read on. 

What is SIP in Mutual Funds?

SIP is a mode of investment in mutual funds. An investor puts in a fixed amount of money at regular intervals (bi-monthly, monthly, quarterly, bi-annually or annually). 

The investor decides the fixed amount and the intervals between investments.

This is your answer to, ’what is SIP in mutual funds?’

Equity Systematic Investment Plan (E-SIP)

This section will answer the query, how to do SIP in stocks. SIP investment is not restricted to mutual funds only. Instead, it extends to equity investments as well. It is known as E-SIP or DIY-SIP (Do it Yourself SIP), equivalent to SIP mutual fund investment.

The advantage of doing an E-SIP is hedging against volatile stock price movements and reducing average costs. However, timing the market becomes vital in this case, as it directly impacts your returns. The next stage is to be regular and disciplined with investing in the stocks for a decent SIP performance.  

SIP Investment Statistics

India is witnessing a historic occasion with unprecedented growth in the number of SIP accounts in mutual funds in SIP investment. As of September this year, 43.2 million active SIP accounts are registered with the Association of Mutual Funds in India (AMFI). The monthly amount of SIP investment India has seen in June this year is Rs.9,155 crores. There is increased traction towards mutual funds via the SIP route in India after the pandemic.

SIP in Mutual Funds vs SIP in Stocks

Now that we have a basic understanding of SIP mutual funds and how to do SIP in stocks, we will shift our focus to ‘Stock SIP vs Mutual Fund SIP’ to have a complete picture of this comparative analysis. Here it goes:

Why is SIP in Mutual Funds a Good Idea?        

  • Lower Concentration Risk: Even if you do E-SIP, you cannot buy all the listed stocks that are traded on that exchange. Diversification will be a problem. However, with an SIP mutual fund, your fund manager has chosen a lot of stocks from diverse sectors with negative correlations among them.
  • Controlled by Fund Manager: An experienced and professional fund manager will be investing on your behalf in a mutual fund. If you are still wondering, what SIP is in mutual funds or how it is beneficial for you, the answer is that you will not have to regularly study and follow the markets in mutual funds. All the research and analysis are done by your fund manager for you.
  • Diversification: Diversification in mutual funds is not only across different stocks from different sectors, but also across a range of asset classes. For instance, there are funds that invest in equity, debt, gold, etc. Thus, if equity markets are down 30% in India for a year, then your SIP minimum return will not go that low due to this diversification across asset classes.  

Why is SIP in Mutual Funds not a Good Idea?

  • Costs of SIP Investment: A fund manager investing your money without you having to do any research comes at a cost. These costs are fees associated with SIP mutual funds. They include entry load, exit load, expense ratio, fund, transaction fee, management fee and switch price.

Why is SIP in Stocks a Good Idea?

  • Lower Concentration Risk: Even if you do E-SIP, you cannot buy all the listed stocks traded on that exchange. Diversification will be a problem. However, with a SIP mutual fund, your fund manager has chosen a lot of stocks from diverse sectors with negative correlations among them.
  • Controlled by Fund Manager: An experienced and professional fund manager will be investing on your behalf in a mutual fund. If you are still wondering what SIP is in mutual funds or how it is beneficial for you, the answer is that you will not have to study and follow the markets in mutual funds regularly. Your fund manager does all the research and analysis for you.
  • Diversification: Diversification in mutual funds is not only across different stocks from different sectors but also across a range of asset classes. For instance, some funds invest in equity, debt, gold, etc. Thus, if equity markets are down 30% in India for a year, then your SIP minimum return will not go that low due to this diversification across asset classes.  

 Why is SIP in Stocks not a Good Idea?

  • Stock SIP is Riskier: It is riskier since you are on your own in the case of SIP in stocks. You will have to figure out when to offload your stake in a company by liquidating its shares. You will have to figure out the right entry and exit point in a stock. You will have to decide which stocks to buy and which ones to avoid. This is a fundamental point of difference in stock SIP vs mutual fund SIP.
  • Follow Markets Regularly: As a person in charge of his/her portfolio, you will have to track different sectors and companies regularly in which you have invested. You will have to read a lot and follow all the news around your portfolio companies. Learning how to do SIP in stocks the right way might take years.   

What are Tax Implications for Stocks and Mutual Funds?

In general, mutual funds and stocks that invest in stocks have similar tax implications. We can see observe the tax implications for short-term capital gains and long-term capital gains in the following table.

Tax implications for stocks and equity-oriented mutual funds:

Type of capital gainTax implications
Long-term capital gain (LTCG)10% above a gain of ₹1,00,000
Short-term capital gain (STCG)15%

A mutual fund that comes with tax benefits is ELSS (Equity Linked Savings Schemes). These are mutual funds that invest in stocks and have a mandatory lock-in period of 3 years. A tax deduction can be claimed on ELSS under Section 80C of the Income Tax Act, 1961.

The Bottom line

The bottom line is if you are a seasoned investor with experience in the market and if you can track the stock market daily, then SIP in stocks is a better bet for you. However, if you are someone who is new to the stock market and is still learning about its nuances, then start with an SIP mutual fund. And, at the same time, learn about how to analyze stock’s fundamentals and when to buy or sell. 

With WealthBaskets, retail investors can invest in portfolios from the leading SEBI registered managers in the country at nominal fees. The managers constantly monitor and balance the WealthBaskets against market changes.

FAQs

What does SIP in stocks mean?

SIP in stocks means you will invest either a fixed amount every month in the stocks you have chosen or you will buy the fixed number of shares of the stocks you have chosen.

Which is riskier in stock SIP vs mutual fund SIP?

Stock SIP is riskier as there are multiple factors involved here, from timing the market to predicting the right entry point in a stock.

What is SIP investment?

SIP investment is a systematic investment plan wherein investors will invest a fixed amount of money in a mutual fund scheme or a stock in fixed intervals.

Is it good to do SIP in stocks?

Yes, it teaches you disciplined investing and helps you in average cost reduction when the stock prices are falling. The compounding effect is the cherry on the cake here.

Stock SIP vs Mutual Fund SIP: Which is more lucrative?

WealthDesk
Stock SIP vs Mutual Fund SIP: Which is more lucrative?

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