SIP in Stocks vs Mutual Funds: What's better for you?

Over the last few years, Systematic Investment Plans (SIPs) have been considered as one of the most appropriate strategies retail investors can use to invest in financial markets. When an investor invests with SIP, they can do so in stocks or mutual funds, as per their financial goals and schedules. The main idea of regular investing remained the same. However, there have been some fundamental differences between stock SIPs vs mutual fund SIPs, which investors need to understand clearly before selecting between them. This article analyses the meaning and mechanics of SIPs in stocks versus SIPs in mutual funds, underpinning critical differences and factors that investors should consider while making decisions.
 

What is a SIP in Stocks?

A SIP in stocks is a process of making regular investments, relatively on a weekly/monthly basis, based on a pre-defined amount to purchase stocks or ETFs that represent corporations. The durations may either be daily, weekly, monthly, or quarterly. For instance, an investor can invest ₹5,000 monthly in the shares of a company called XYZ company. Investing in equal positions ensures that an investor buys more units at depressed share prices but sells fewer units at high prices.

This cost averaging of the rupee also allows for a reduction in the average price, which was gone in acquiring the shares for a period of time. The fixed periodic investments also help in wealth accumulation by the power of compounding.

INDmoney's Stocks SIP empowers investors to harness the growth potential of individual stocks. With a diversified portfolio curated by financial experts, this feature minimises risk while maximising returns.

You can calculate the returns of a Stock SIP with a SIP Calculator.
 

What is a Mutual Fund SIP?

Mutual fund SIP works on the same principle of disciplined investing as a stock SIP. The investors set aside a fixed amount periodically, for example, every month, to buy units of a mutual fund scheme. The key difference here is that the investment is spread across multiple securities that a mutual fund invests in, unlike a stock SIP. For example, an investor might put, let's say, ₹5,000 monthly in an equity fund, which then invests the money across, say, 50 stocks. This provides diversification compared to investing in just one stock. It also provides access to professional fund management instead of the individual picking stocks themselves.

Key Differences between a SIP in Stocks and a SIP in Mutual Funds

While both Stock SIP and Mutual Fund SIP follow a systematic investment approach, they differ significantly when it comes to execution, risk, and management. Stock SIP lets investors buy shares of specific companies at regular intervals, giving them direct ownership and control over the stock selection process. Stock SIP requires investors to actively monitor their investment returns and have a good understanding of the market. On the other hand, Mutual Fund SIP invests in a diversified portfolio managed by professionals. This reduces the need for investors to actively research each stock.

Stock SIP vs Mutual Fund SIP

While common concepts of investments are regularly practised in both SIPs of Stocks and Mutual Funds, the following are the significant differences between Stock SIP vs Mutual Fund SIP:
 

Mutual fund SIPs ensure professional management along with the benefits of diversification and liquidity at a relatively low cost. On the other hand, Stock SIPs give the ability to focus on one particular stock, but would involve research and would come with concentration risks. Investors should appreciate these fundamental points of difference before choosing between the two.

Factors to Consider Before Choosing Between Stock SIP and Mutual Fund SIP

Before selecting between a Stock SIP and a Mutual Fund SIP, one should evaluate several key factors like:

• Risk Tolerance: Stock SIPs carry higher risk due to individual stock exposure, whereas Mutual Fund SIPs provide diversification and have relatively lower risk attached to them.
• Knowledge of the Stock Market: Managing a Stock SIP requires market expertise and active monitoring, whereas Mutual Fund SIPs are professionally managed, making them ideal for passive investors.
• Diversification: Mutual Fund SIPs automatically diversify investments across multiple assets, reducing risk. On the other hand, Stock SIPs concentrate on selected stocks, which could increase volatility.
• ROI Expectations: Stock SIPs can potentially deliver higher returns but come with market fluctuations, whereas Mutual Fund SIPs aim for steady, long-term growth.
• Time Commitment: Mutual Fund SIPs offer a hassle-free, automated investment avenue whereas Stock SIPs require continuous tracking and decision-making. 
• Cost & Charges: Mutual Fund SIPs may include expense ratios and fund management fees, whereas Stock SIPs involve brokerage and transaction costs.

Investors should assess their financial goals, risk appetite, and availability before making a choice between a Stock SIP and Mutual Fund SIP, which aligns with their long-term investment strategy.

 

Pros, Cons and Key Factors to consider before selecting a Mutual Fund SIP

Pros of a Mutual Fund SIP:

• Diversification: Mutual Fund SIPs spread investment across multiple stocks and sectors, reducing risk.
• Professional Management: Managed by experienced fund managers, Mutual Fund SIPs are an ideal choice for passive investors.
• Rupee Cost Averaging: This SIP type helps buy more units when prices are low and fewer when prices are high, reducing market timing risk.
• Convenience & Automation: Mutual Fund SIPs require minimal effort with automated monthly investments deducted directly from your bank account.
• Tax Benefits: Certain mutual funds (like ELSS) offer tax deductions under Section 80C.
   

Cons of a Mutual Fund SIP:

• Expense Ratio: Management fees and other charges can impact overall returns coming from a Mutual Fund SIP investment.
• Lower Control: Investors have no direct control over stock selection or fund decisions, when it comes to Mutual Fund SIPs. 
• Lock-in Periods: Some funds, like ELSS, have mandatory lock-ins, limiting liquidity.
• Market Risks: Though diversified, mutual funds are still subject to market fluctuations.

Factors to Consider before choosing a Mutual Fund SIP

• Scheme Selection: Evaluate fund category, investment style, and portfolio composition cautiously while selecting the scheme.
• Fund Performance:  Try to choose funds with an existing and consistent long-term track across either 1-3 or 5-year based outperformance over respective benchmarks and categories.
• Cost:  Look at the expense ratio of the mutual fund scheme and go for reasonably priced schemes.
• Fund House Reputation:  Go for fund houses that have been around for a long and have a culture of protecting investor interest.
• Portfolio Fitment: Ensure that the mutual fund scheme is adding diversification benefits and fits as per your goals. 
• Read Scheme Documents: Read the Scheme Information Document and the Key Information Memorandum carefully before investing.
• Long-term Approach: SIPs in mutual funds also require a disciplined long-term approach of 5 years or above.
• SIP Discipline: Stay invested systematically through the ups and downs in the market.
   

You can also explore the top Large Cap Mutual Funds for 2025
Small Cap Mutual Funds for 2025
Mid Cap Mutual Funds for 2025 
Flexi Cap Mutual Funds for 2025 
on INDmoney here.
 

Pros, Cons and Key Factors to consider before selecting a SIP in Stocks

Pros of a Stock SIP:

• Direct Ownership: Investors have full control over stock selection and portfolio allocation.
• Higher Return Potential: A SIP in Stocks can generate higher returns than mutual funds if the right stocks are chosen.
• No Expense Ratio: Unlike mutual funds, Stock SIPs have no fund management fees, reducing costs.
• Customization & Flexibility: Investors can adjust SIP amounts, add/remove stocks, and change strategies as needed.
• Tax Efficiency: Gains are taxed based on long-term or short-term capital gains rules, allowing for better tax planning.

Cons of a SIP in Stocks:

• Higher Risk: Individual stocks are more volatile, and poor stock selection can lead to significant losses.
• Requires Market Knowledge: Investors need to research and monitor stocks regularly, when investing via SIP in stocks.
• No Automatic Diversification: Unlike mutual funds, diversification must be done manually.
• Emotional Investing Risks: Investors may panic during market fluctuations and make impulsive decisions.
   

Factors to Consider before choosing a SIP in Stocks

• Research: Do thorough research about the company, its financials, competitors, industry outlook, etc., before zeroing in on the stock for SIP.
• Valuations: Determine if the current valuations of the stock are attractive and related to its growth prospects. Avoid investing in substantially overvalued stocks.
• Growth Prospects: The stock shall have strong long-term growth drivers that could sustain capital appreciation.
• Financial Health: The company shall have solid financials on increased revenues, profits, better cash flows, and lesser debt.
• Management: The quality leadership team and the corporate governance standards of the firm needed to be sturdy. 
• Diversification: Balance in providing linkage of SIP with stocks in other asset classes, such as debt and gold, for overall portfolio risk management.
• Long-term Horizon: Stock SIPs require a long investment horizon of 5-10 years to ride the volatility.
• SIP Discipline:  Commit to sticking with SIP irrespective of market corrections and volatility.

How are Stock SIPs and Mutual Fund SIPs taxed?

The taxation of Stock SIPs and Mutual Fund SIPs differs basis the classification of gains and the holding period:  

Stock SIP Taxation:

• Gains from stock SIPs are subject to capital gains tax based on the holding period.
• If stocks are sold within one year, gains are taxed at 15% (Short-Term Capital Gains - STCG).
• If stocks are sold after one year, gains over ₹1 lakh are taxed at 10% (Long-Term Capital Gains - LTCG), while gains up to ₹1 lakh are tax-free.
• No additional expense ratio or fund management fees apply.
   

Mutual Fund SIP Taxation:

• Equity Mutual Funds are taxed similar to stocks i.e 15% for STCG (redemption within a year) and 10% for LTCG (after a year, with ₹1 lakh exemption).
• Debt Mutual Funds are taxed as per the investor’s income tax slab rate, making them less tax-efficient for short-term holding.
• Since mutual fund SIPs involve multiple installment purchases, each SIP installment is treated separately for taxation purposes based on its individual holding period.
   

Essential Calculators for all SIP in Stocks and SIP in Mutual Fund Investors

Conclusion

Systematic investment plans, or SIPs, are the latest buzzword in town, providing a smart investment method. While SIPs could be made across equities and mutual funds, critical points of divergence comprise diversification, liquidity, costs, fund management, and investment research. SIPs in mutual funds offer a hands-off approach toward investing, taking into consideration asset classes and securities. Stock SIPs require active research for stock picking but allow betting on high-conviction ideas. Its investors should analyse its risk appetite, investment goals, and ability to research stock before deciding between stock SIPs and mutual fund SIPs.