With systematic investment plans (SIPs) gaining popularity, it is crucial to understand the difference between a stock SIP and a mutual fund SIP so you can pick the most suitable plan based on your risk appetite and budget.
Many falsehoods exist about stock SIPs, including the belief that it is the same as mutual fund SIP, which could lead to making wrong decisions and eventually proving a losing gamble for investors.
A stock SIP and a mutual fund SIP are not the same. In a stock SIP, you can invest a fixed number of a particular share. Investors select the stock , payment frequency, and SIP duration, while the brokerage does the rest on their behalf.
Unlike a stock SIP, which invests in just one share, mutual fund SIPs can invest in different company shares, and investors get fractional units in instalments.
Moreover, a mutual fund SIP is professionally managed, whereas you are your own manager in a stock SIP. Managing a stock SIP independently could be overwhelming for an ordinary investor due to a lack of time and knowledge.
Thus, a mutual fund SIP has a better risk-management ability than a stock SIP because of asset diversification and offers perhaps even cost-efficiency.
A major requirement in a stock SIP is that the investor must have the knack to select the right stock, and only then can they expect a profit or better return.
The investor cannot replace the stock later if it is underperforming. So, picking the winning stock at the outset is crucial. A potential multi-bagger stock could put you on a solid footing early on and possibly higher returns over time.
Hence, the belief that stock SIPs give higher returns than mutual fund SIPs may not be completely correct.
Stock SIPs can help you buy a specific stock at different price points. But over time, it increases the risk of over-concentration of a particular stock.
The risk concentration could be a major downside. It can get worse if the investor doesn’t pick the right stock. Still, a stock SIP can help you average the cost in times of volatility and inculcate investment discipline. But if you don’t have the expertise to evaluate a stock, then stay away from stock SIPs.
Stock SIP Vs Mutual Fund SIP In Brief
· Stock SIPs are for seasoned investors who can manage independently, whereas mutual fund SIPs could be ideal for first-time retail investors.
· Stock SIPs do not provide diversification as they pick 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 concentration, whereas mutual fund SIPs are less risky due to diversification.
· Stock SIPs don’t allow purchases in fractions, whereas unit allotments in mutual fund SIPs are based on the net asset value (NAV).
· Stock SIP holders are their own managers, but mutual fund SIPs are professionally managed.
(Read 3 Myths Around Stock SIPs to know more about Stock SIPs.)
