In the last few years, Systematic Investment Plans (SIPs), have been considered one of the most appropriate strategies retail investors can use to invest in financial markets. While investing with SIP, the investors can invest an amount of money to invest in stocks or mutual funds, as per their respective schedules. The central idea of regular investing remained the same. However, there have been some fundamental differences between stock SIPs vs mutual fund SIPs, which investors would need to comprehend before selecting between them. This article analyses the meaning and mechanics of SIPs in stocks versus mutual funds, underpinning critical differences that investors should consider while making decisions.
Meaning of 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 company’s shares 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.
Mutual Fund SIP Meaning
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, tell, 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.
Dive into the basics of mutual funds, exploring what they are and how they work on INDmoney.
SIP in Mutual Funds vs SIP in Stock Key Differences
While common concepts of investments regularly are practised in both SIPs of Stocks and Mutual Funds, the following are the significant differences:
| Aspect | Mutual Fund SIP | Stock SIP |
| Diversification | Diversified across many securities | No diversification. Focused on a single stock |
| Professional Management | Managed by a team of experienced fund managers | Individual investor responsibility |
| Liquidity | Easily redeemable at NAV directly with the fund | Maybe less liquid depending on trading volumes |
| Investment Universe | Flexible across equities, bonds, gold, etc. | Restricted to the equities market |
| Passive Investing | Often mimics broader market returns | Requires active stock picking and research |
| Costs | Incurs expenses through expense ratios | Directly involves brokerage and demat fees |
| SIP Amounts | Lower minimum installments (e.g., ₹500 per month) | Broker may have higher minimum investment |
| Wealth Creation | Benefits from compounding with diversified basket | Single company performance basis |
Mutual fund SIPs promise professional management along with the benefits of diversification and liquidity at a relatively low cost. Stock SIPs give the ability to focus on one high-conviction stock idea, but they would involve research an investor needs to put into them and come with concentration risks. Investors should appreciate these fundamental points of difference before choosing between the two.
Things to Keep in Mind Before Stock SIP
- Research - Do good 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.
Things to Bear in Mind Before 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 Fit – 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.
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.