Mutual Funds SIP vs Stock SIP: Which is the Better Investment Option for You?
A lot of people are investing through mutual funds SIP (Systematic Investment Plan), but did you know you can also invest directly in stocks using SIP? And there are many benefits to this.
In this blog, we will do a detailed comparison between mutual funds and stock SIP, and also learn how to invest step by step in stock SIP. By the end of this post, you’ll have a better understanding of both options and be able to make an informed decision. So, keep reading!
Mutual Funds SIP – An Overview
When it comes to mutual funds SIP, there are two main ways to invest:
- Lump Sum Investment: If you receive a bonus or have inherited some money, you can invest a large sum in a mutual fund all at once.
- SIP (Systematic Investment Plan): This is the option where you invest a fixed amount every month or quarter. Over time, your investments accumulate, earn returns, and benefit from the power of compounding. This leads to a substantial corpus when you retire or when your financial goals are met.
Benefits of Mutual Funds SIP
- No Large Initial Investment: You don’t need a significant amount to get started; just invest a small sum regularly, say monthly.
- Compounding: With SIP, your money grows with the power of compounding, making it a great option for long-term goals.
- Averaging the Market Volatility: The market tends to go up and down, but SIP helps you average out the cost of investment by buying when the market is low and selling when it’s high.
Stock SIP: A Direct Investment Option
While many people opt for mutual funds SIP, stock SIP is also a viable option when you want to invest in stocks systematically. Stock SIP allows you to invest a fixed amount into individual stocks every month, much like the SIP method used in mutual funds.
But, should you choose stock SIP or mutual fund SIP? Let’s dive into a comparison of both.
Mutual Funds SIP vs Stock SIP: A Comparison
We’ll compare mutual funds SIP and stock SIP on six essential parameters to understand which investment method is best for you.
1. Diversification
Mutual Funds SIP: When you invest in a mutual fund, your money is spread across a diversified portfolio of stocks. This typically includes anywhere from 40-50 stocks, which helps reduce risk and manage market volatility.
Stock SIP: When you invest directly in stocks, you need to diversify yourself. It’s generally recommended to hold a portfolio of 10-15 carefully selected stocks. While diversification is important, too much diversification can reduce your returns, which is why a focused portfolio can be beneficial.
Verdict: Mutual funds SIP score higher in terms of diversification since they provide instant diversification across multiple stocks.
2. Professional Management
Mutual Funds SIP: Investing in mutual funds means your money is being managed by a professional fund manager. These experts take care of your investment, and you don’t have to worry about the market on a daily basis.
Stock SIP: When you invest in stock SIP, you have to manage your portfolio yourself. While this gives you more control, it also requires time, effort, and expertise.
Verdict: Mutual funds SIP get a thumbs up for professional management since experts handle the investment on your behalf.
3. Convenience
Mutual Funds SIP: One of the greatest advantages of mutual funds SIP is convenience. You only need to set up the SIP, and the mutual fund will automatically invest your fixed amount each month, with minimal effort on your part.
Stock SIP: Investing directly in stocks is more time-consuming. You need to conduct your own research, pick stocks, and monitor your investments, which requires more effort.
Verdict: Mutual funds SIP win for convenience as they are easier to manage.
4. Expenses
Mutual Funds SIP: Since you’re paying a fund manager for their expertise, mutual funds charge an expense ratio, typically around 1% to 1.5% of your total investment. Over time, this can add up, making mutual funds more expensive than stock SIP.
Stock SIP: With stock SIP, you don’t have to pay an expense ratio. You only bear brokerage charges, which are usually much lower than the fees for mutual funds.
Verdict: Stock SIP is better when it comes to cost-efficiency since there are no additional charges, unlike mutual funds.
5. Control
Mutual Funds SIP: When you invest in a mutual fund, the fund manager makes all the decisions on where to invest. This means you lose some control over your investments. Even if the market is at a high, the fund manager will still invest, which might not align with your personal preferences.
Stock SIP: In stock SIP, you have full control. You can select the stocks to invest in, stop the SIP when the market is high, and choose the right stocks at the right time.
Verdict: Stock SIP scores higher in terms of control, as you have full decision-making power.
6. Potential for Higher Returns
Mutual Funds SIP: While mutual funds offer steady returns, the expense ratio, professional management, and diversification can somewhat limit your returns.
Stock SIP: When you invest in individual stocks, the potential for higher returns increases. You can pick high-performing stocks and have greater flexibility in your investments.
Verdict: Stock SIP has a higher potential for returns because of its flexibility and ability to focus on high-growth stocks.
A Quick Comparison of Potential Corpus
Let’s assume you’re investing Rs 10,000 per month for 35 years, starting at the age of 25. Here’s a comparison of mutual fund SIP vs stock SIP:
- Mutual Fund SIP (10% annual return): The corpus at retirement could be around Rs 3.8 Crores.
- Stock SIP (13% annual return): The corpus could be around Rs 8.4 Crores.
Now, if we increase the return assumptions to 12% for mutual funds and 15% for stocks:
- Mutual Fund SIP: Rs 6.4 Crores.
- Stock SIP: Rs 14.67 Crores.
Note: These estimates are based on realistic returns and the power of compounding over time.
As you can see, the difference is significant! Investing in stocks can potentially double your returns compared to mutual funds SIP, thanks to the higher growth potential, lower fees, and better control.
How to Invest in Stock SIP
You can set up stock SIPs with any broker. Here’s an example using Zerodha Kite:
- Create a Basket: Choose stocks you want to invest in and create a basket (e.g., large-cap or auto sector stocks).
- Add Stocks: Select the stocks you want to invest in, set the quantity, and decide whether you want to use a market order (recommended for SIP) or a limit order.
- Set SIP Schedule: Select the amount to invest and set a monthly schedule.
- Create SIP: Once your basket is ready, you can set the SIP schedule and start investing systematically.
Final Verdict: Mutual Funds SIP vs Stock SIP
So, which is better—mutual funds SIP or stock SIP?
The best strategy is to combine both. Mutual funds SIP work well for diversification and lower risk, while stock SIP can help you boost returns with more control and higher potential.
By using both, you get the best of both worlds: a diversified portfolio with mutual funds and the opportunity to earn higher returns with stock SIP.
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Investment and securities market are subject to market risk. Always read all related documents carefully before investing.