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With Strategic Investment Plans (SIPs) gaining popularity, it is important to understand the difference between SIP and mutual fund SIP so that you can choose the most suitable plan based on your risk appetite and budget.
There are many myths about SIPs, including the belief that it is the same as a mutual fund SIP, which leads to wrong decisions and ultimately proves a losing gamble for investors.
Stock SIP and Mutual Fund SIP are not the same. You can invest a certain fixed share in a stock SIP. Investors choose the stock, payment frequency and duration of the SIP, and the broker does the rest for them.
Unlike a single stock SIP, where you invest in just one stock, mutual fund SIPs can invest in different company stocks, and investors get fractional units.
Also, mutual fund SIP is professionally managed and you are your own manager in SIP. Managing a stock SIP on your own can be difficult for a common investor due to lack of time and knowledge.
Hence, mutual fund SIPs offer better risk-management capabilities than stock SIPs in terms of asset diversification and possibly cost savings.
The main requirement in SIP is that the investor should have the ability to choose the right stock, and only then they can expect profit or better return.
The investor cannot replace the stock after it underperforms. Therefore, it is important to choose the winning stock at the beginning. A potential multi-bag stock can put you on a solid footing in the beginning and possibly pay off big over time.
Hence, the belief that stock SIPs offer higher returns than mutual fund SIPs may not be entirely correct.
Stock SIPs can help you buy a particular stock at different price points. But over time it increases the risk of over-accumulation of a particular stock.
The risk focus can be a big downside. It can be worse if the investor does not pick the right stock. Still, a stock SIP can help you cost-averaging and inculcate investment discipline in times of volatility. But if you don’t have the knowledge to evaluate stocks, stay away from stock SIPs.
Stock SIP Vs Mutual Fund SIP in brief
· Stock SIPs are for experienced investors who can manage independently, while mutual fund SIPs may be suitable for first-time retail investors.
· Stock SIPs do not provide diversification as you choose only one stock unless you start multiple SIPs. On the other hand, MF SIPs offer diversification across stocks and sectors.
· Stock SIPs come with higher risk due to stock accumulation, whereas mutual fund SIPs are less risky due to diversification.
· Share SIPs do not allow you to buy in dividends, but the dividend in mutual fund SIPs is based on net asset value (NAV).
· Stock SIP holders are their own managers, whereas mutual fund SIPs are professionally managed.
(To know more about Stock SIPs, read 3 Myths in Stock SIPs.)
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