Systematic investment plans (SIPs) have become a common tool for people wishing to make consistent regular investments and over time create wealth in the fast-paced financial environment of today.
SIPs let investors commit a set amount of money at regular intervals, so investing opportunities are opened even for people who might not have a sizable lump sum at first. SIPs provide beginners with the benefits of discipline, rupee cost averaging, and long-term compound wealth-building ability.
When deciding between stock SIP and mutual fund SIP, many investors, though, are not sure which road to follow. Although both approaches allow for methodical investments, their degrees of risk, control, and possible returns vary. This article will break down the key differences between equity SIP vs mutual fund SIP.
Understanding SIP
A systematic investment plan is a methodical approach to investing. SIPs provide investors with a disciplined and handy approach to progressively create wealth, gain from rupee cost averaging, and make use of long-term compounding potential.
Rupee cost averaging works by consistently investing a fixed amount. When prices drop, you get more for your money. When prices go up, you get less. But over time, this brings down your average cost per unit. It takes away some of the pressure of trying to time the market perfectly.
Investors aiming to reach different financial objectives—such as wealth building, retirement planning, or funding education—that allow flexibility to fit changing economic conditions will find this approach suitable.
So, which is better, SIP or share market investing? While direct stock market investments offer greater possible returns but come with more risk and involvement, SIPs provide a safer, hands-off approach with professional management. In the end, your risk tolerance, investment experience, and personal inclination will determine the decision.
Also read: SIP investment: Your path to wealth building
What is a mutual fund SIP?
Including equity, debt, or hybrid funds, a mutual fund SIP is a disciplined approach to consistent mutual fund investing. Investors fund the selected mutual fund by a fixed amount paid at regular intervals—monthly or quarterly—using a mutual fund SIP. Professional fund managers oversee these monies and make portfolio investment decisions depending on the goals of the fund.
Starting a mutual fund SIP entails selecting a mutual fund based on your financial objectives and risk profile. For instance, stable long-term growth is more likely from a well-diverse equity fund. You then decided on a set investing figure.
Your bank account automatically debits the amount, which then purchases mutual fund units. To distribute the risk, the professional fund manager separates the fund’s assets—stocks, bonds, and other securities—among several sources.
Example – A moderate risk profile investor might invest by starting a mutual fund SIP of ₹3000 on a large-cap equity mutual fund. The fund’s main aim is to invest collective money with several other investors towards a well-equipped large-cap stocks portfolio which provides less risk and growth opportunities.
Advantages of mutual fund SIP:
- Professional management: Beginners might consider it ideal since expert fund managers handle investment decisions.
- Diversification: Mutual funds lower risk by distributing investments among several asset classes.
- Low-risk option for beginners: Comparatively to individual stock investing, mutual fund SIPs provide a more consistent and less volatile method.
Risks of mutual fund SIP:
- Management fees: Fund management fees must be paid by investors. Thus, they can affect returns.
- Market-related risks: Mutual funds, while diversified, are still subject to market fluctuations.
- Limited control: Individual stocks or assets within the mutual fund are not something you can select; the fund manager handles this.
What is a stock SIP?
Like a mutual fund SIP, a stock SIP lets investors commit a set amount of money at consistent intervals in individual stocks. Rather than pooling your money into a mutual fund, you decide on particular stocks to periodically invest in. Allowing investors to create wealth gradually helps them benefit from rupee cost averaging and saves the need for a sizable lump sum investment.
In a stock SIP, you choose particular stocks you want to invest in. You then select the fixed sum you will be consistently investing—perhaps monthly or quarterly. For instance, if you decide to invest ₹5,000 a month in a stock SIP, the exact amount will be used to purchase shares of a company, regardless of stock price swings. You build shares in that company over time; the cost per share averages out across several market environments.
Example – An investor is establishing a stock SIP in Reliance Industries with ₹5,000 a month. Every month the funds are used to purchase Reliance shares. Should the stock price be ₹ 2,500 in one month, the investor would buy two shares; in a month when the stock price is ₹ 1,250, the investor would buy four shares. This lets the investor regularly build shares over time.
Advantages of stock SIP:
- Direct ownership of stocks: You have complete control over your investments since you own the shares directly.
- Customisable portfolio: Your risk tolerance and interests will guide you in creating a portfolio.
- Potential for higher returns: Over the long run, choosing the correct stocks will help you to enjoy notable returns.
Risks of stock SIP:
- Stock market volatility: Stock values vary greatly, which causes temporary losses.
- Requires stock selection knowledge: You should know about individual stocks and market trends.
- No diversification: If a few stocks underperform, you could be exposed to concentrated risks.
Stock SIP vs mutual fund SIP
| Stock SIP | Mutual fund SIP | |
| Investment type | Direct stock investments on your own | Pooled investment in a professionally managed portfolio |
| Control & flexibility | High – You select and control stock choices | Low – Investment decisions are made by the fund manager |
| Risk profile | Higher – Depends on the performance of specific stocks | Lower – Diversification reduces the impact of poor stock performance |
| Knowledge & research | Requires a thorough understanding of stock market trends | Minimal research is needed, but basic knowledge of markets is helpful |
| Management | Self-directed – All investment choices are made by you | Managed by professionals who handle selection and adjustments |
| Minimum investment | Depends on stock prices and number of shares | Generally lower with predefined minimum amounts |
| Returns potential | Can be higher if selected stocks perform well | More stable but typically lower returns due to diversification |
| Suitability | Best for experienced investors who can handle risk | Ideal for beginners or those preferring a guided investment strategy |
You may also like: SIP vs PPF: Investing regularly
Stock SIP vs mutual fund SIP – Which one is suitable for you?
When deciding between a stock SIP and a mutual fund SIP, consider the following factors:
- Risk tolerance: A stock SIP might be more appealing if you enjoy managing your investments and are comfortable with more significant risks. Nevertheless, be ready for a lot of research and the chance of losing a lot of money.
- Investment knowledge: Stock SIPs call for a strong understanding of stock market analysis and trends. A mutual fund SIP provides a more straightforward and less demanding substitute if you’re new or lack the time for a thorough investigation.
- Time commitment: Managing a stock SIP calls for more attention since you have to follow stock performance and market changes. Mutual fund SIPs, on the other hand, are handled by experts, so you may invest without having to commit time to active management.
- Investment Goals: Match the SIP you selected with your long-term objectives. While balancing risk with mutual funds, a stock SIP could be appropriate for part of your investments if your goal is perhaps higher returns and you are open to active portfolio management. Conversely, a mutual fund SIP might be the better fit if you want a more steady, hands-off approach.
Further reading: EMI vs SIP: Features, analysis and pros & cons
Bottomline
SIP supports systematic investing practices. Consistent fixed-amount investing, regardless of market conditions, helps avoid emotional decisions motivated by market volatility.
Stock SIPs expose more risk even if they can provide better returns. Though usually with less growth potential, mutual fund SIPs offer a balanced, professionally managed approach with more consistent returns.
The decision ultimately depends on your particular situation, risk tolerance, and financial goals.
FAQs
- Can I start SIP in stocks?
Yes, you can start a SIP in stocks. Stock SIPs allow you to invest a fixed amount regularly in selected stocks, helping you build a portfolio over time. This approach can potentially offer higher returns but comes with higher risk compared to mutual fund SIPs. It’s essential to have a good understanding of the stock market and be prepared for market volatility.
- Is it better to buy stock or mutual funds?
Choosing between stocks and mutual funds depends on your risk tolerance, investment knowledge, and time commitment. Stocks offer higher potential returns but come with higher risk and require more active management. Mutual funds provide diversification, professional management, and more consistent returns, making them suitable for those seeking a balanced approach. Assess your financial goals and risk appetite to decide which option aligns best with your investment strategy.
- Is SIP better than FD?
SIPs and FDs serve different financial goals. SIPs in mutual funds offer the potential for higher returns through market investments, ideal for long-term growth but with higher risk. Fixed Deposits (FDs) provide guaranteed returns and capital safety, making them suitable for conservative investors seeking stability. Your choice depends on your risk tolerance, investment horizon, and financial objectives. Diversifying between both can balance risk and returns.
- Can I withdraw SIP anytime?
Yes, you can withdraw your SIP investments anytime, but it depends on the type of mutual fund and its exit load. Some funds may charge a fee if you withdraw within a certain period. It’s important to check the specific terms of your SIP plan. Withdrawing early might also impact your long-term financial goals, so consider your investment horizon before making a decision.
- Can SIP go in loss?
Yes, SIP investments can incur losses, especially in the short term, due to market volatility. Since SIPs invest in mutual funds or stocks, their value fluctuates with market conditions. However, the systematic approach of SIPs helps mitigate risk over the long term through rupee cost averaging. It’s important to stay invested for the long term to potentially recover from short-term losses and achieve financial goals.
