SIP in Mutual Funds vs SIP in stocks: Which is better for you?

April 8, 2021 4:58 PM

Following this route, the investors would not need to time the market, invest through a regulated approach and protect themselves during volatile times while earning better returns.

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Gone are those days when roti, kapda and makaan were the basic requirements of human life. With major advancements in the 21st century, the internet and SIP (Systematic Investment Plan) have got into this new list of bare essentials. We often hear the Millenials promoting “SIP it, shut it and forget it” rather than fostering “Buy low and sell high”. Because in their belief, timing the market is way too complicated, and in most cases, it never works.

Volatility in recent months has tested the patience of the market participants. The pandemic was the major cause behind this and thus, news like the COVID vaccine’s availability brings optimism to the market, which rallies the market upwards. Simultaneously, the information of rising COVID cases on the other hand brings the stock market downhill. In such an erratic mode of market conditions, doing a SIP is highly recommended.

Just like a SIP in mutual funds, one can also go for the ESIP (Equity SIP) route to park their small amount of investments in stocks at regular intervals. This move would give investors an advantage over unpredictable stock price movements. Following this route, the investors would not need to time the market, invest through a regulated approach and protect themselves during volatile times while earning better returns.

SIP in stocks allows investors to fix either the amount to be invested or the number of shares needed to be purchased at a regular interval. Like mutual funds SIP, an ESIP allows investors to invest in stocks in a disciplined manner, helps them spread their investments over time, and lets them benefit from rupee cost averaging, thereby creating a sizable corpus with small investments.

ESIPs are a good option for investors as one can get more stocks when the prices are low, as compared with the tenure when the prices are higher. But one limitation of ESIP is that it may not necessarily offer you the advantages of price averaging. One of the important rules of equity investment is buying at the right valuation but with systematic investments in stocks, one does not look forward at the valuations, rather they look at the number of units he/she might be getting.

A significant and complex task here is choosing the stock you want to invest in. You need to select companies that have the potential to deliver strong earnings growth, have good corporate governance and remit high return ratios. But despite selecting a company that meets the above criteria, the chances of good returns are not 100%. The Indian stock market has seen many bull runs where technology, pharma, telecom and media stocks were considered the epitome of quality stocks matching all the above factors. Had you picked top-quality stocks of that time – Infosys, Satyam Computers, Reliance Communications, DHFL – you would have seen your wealth getting eroded as three of the four haven’t even survived to date.

Thus, to achieve a good balance in its portfolio, an investor needs to closely monitor the weights that he/she has allocated towards the portfolio. Instead of chasing the ratios or numbers, an investor should take a look at the business. For instance, you would not invest in the typewriter business now, given the fact that laptops are available at a steeper price nowadays. Also, the concentration towards a single stock or a sector should not be much, since the higher the concentration, the more it will be exposed to the risk of that bet going wrong. Therefore, taking a measured exposure towards stock or sector is easier with lump sum investments but with SIP’s you can keep pumping money into a single stock or industry for years, tweaking its weight in your portfolio.

So, a SIP in a mutual fund gives you the benefit of being exposed to lower concentration risk as compared to a SIP in stocks. Finally, the secret of creating enduring wealth from the stock market is periodically tracking the business or the sector that you have parked your money in.

An equity SIP may have its own set of limitations, but one can supplement their existing investments if used wisely. ESIP cannot replace a mutual fund for most retail investors, but ESIP can be a good supplement to the mutual fund portfolio. Many times mutual funds steer clear out of favour stocks which actually might be value buys. Therefore, ESIP can be a great tool to access a portfolio of such stocks.

by, Pranjal Kamra, Founder and CEO – Finology

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