Stock SIP vs mutual fund SIP: Meaning and differences

Investing can be a rewarding pursuit, but selecting a suitable investing avenue is essential, especially if you’re new to the world of finance. While experienced investors may buy shares based on their assessment of the market, many others prefer the systematic route of a SIP (Systematic Investment Plan) in mutual funds. Although mutual funds are widely known for SIPs, it’s also possible to invest systematically in individual stocks too.

Let us understand Stock SIP vs mutual fund SIP, clarify the differences, and help you decide which path aligns best with your goals.

• Table of contents

• What is mutual fund SIP?
• What is stock SIP?
• Stock SIP vs mutual fund SIP: Features
• Stock SIP vs mutual fund SIP at a glance
• Factors to consider before choosing stock SIP
• Is SIP in mutual funds a good idea?
• Things to keep in mind before opting for SIP in stocks
• Which is more suitable between stock SIP or mutual funds SIP?

What is mutual fund SIP?

A mutual fund SIP involves investing a fixed sum in a fund scheme at regular intervals. In this arrangement, your money is pooled with contributions from other investors and managed by a professional fund manager who allocates the collective funds across various securities. Depending upon the scheme category and the investment approach, this portfolio can include equities, debt instruments or a combination of both. Other asset classes such as commodities can also be a part of the portfolio. This diversification often results in lower volatility than investing in individual stocks, as the fund aims to generate returns aligned with its stated objectives.

What is stock SIP?

The concept of SIP was popularised by mutual funds, but variations of it is now offered by some stock broking companies too.

The stock SIP meaning is straightforward. It involves regularly purchasing shares of one or more specific companies at fixed intervals, such as weekly, monthly, or quarterly. By investing a fixed amount periodically, you aim to average your purchase cost over time. Although it doesn’t eliminate risks inherent to individual stocks, it reduces the emotional stress of market timing.

Stock SIP vs mutual fund SIP: Features

Here are some features of stock SIP and mutual fund SIP and how they differ:

1. Diversification
   • Stock SIP: Depends on your choice of stocks; you will need to do your research and create your own portfolio.
   • Mutual fund SIP: Offers in-built diversification due to investments spread across multiple assets
2. Management
   • Stock SIP: You manage your own portfolio, decide which stocks to invest in, and track them.
   • Mutual fund SIP: A professional fund manager handles selection and allocation.
3. Risk profile
   • Stock SIP: Individual stock volatility can be high.
   • Mutual fund SIP: Risks are spread across multiple holdings.
4. Time commitment
   • Stock SIP: Requires ongoing tracking of each stock’s fundamentals.
   • Mutual fund SIP: Generally, less intensive since fund managers track and adapt the portfolio to changing market conditions.
5. Nature of investment
   • Stock SIP: Invests in individual stocks.
   • Mutual Fund SIP: Invests in a basket of securities depending on the fund type.

Stock SIP vs mutual fund SIP at a glance

Here’s a tabular representation of the differences between stock SIP and mutual fund SIP.

Aspect	Stock SIP	Mutual Fund SIP
Investment approach	Invest in individual shares	Invest in a diversified portfolio
Management style	Self-directed research	Professional fund management
Risk level	Higher if limited stocks	Spread across multiple instruments
Monitoring requirement	Frequent tracking of each stock	Moderate, manager-driven
Fees/costs	Brokerage per transaction	Expense ratio for fund management

Factors to consider before choosing stock SIP

1. Market knowledge:
   • Unlike in mutual funds, you need to create your own stock portfolio. So, thorough knowledge of how the market works is essential.
2. Company fundamentals
   • Examine the financial health, revenue growth, profit margins, and corporate governance of the company.
3. Industry outlook
   • Understand the relevant sector’s prospects and cyclical patterns. Favourable industry outlook can potentially aid the growth of a fundamentally strong company.
4. Volatility
   • Single stocks can witness steep price fluctuations. Assess whether you can withstand this volatility and diversify across stocks to mitigate risk.
5. Brokerage and other costs
   • Frequent buying can incur recurring brokerage fees and transaction costs, impacting your net returns.
6. Time and expertise
   • Stock SIP requires you to stay updated with company news, earnings reports, and market trends.

Is SIP in mutual funds a good idea?

Mutual fund SIP investment is popular for several reasons:

• Ease of investing: Unlike with stocks, you do not need to curate your portfolio.
• Diversification: Mutual funds invest in multiple securities, mitigating single-stock risk. However, returns are still subject to market risk.
• Professional management: Professionals handle asset allocation and rebalancing, so you do not need extensive knowledge of market movements. However, some familiarity is recommended to make informed decisions.
• Regular plans: If you prefer personalised guidance, you can choose regular plans sold via distributors or brokers.

Things to keep in mind before opting for SIP in stocks

While investing directly in stocks, one should keep the following things in mind:

1. Market knowledge
   • Familiarise yourself with sector outlooks, company performance, and market trends.
2. Long-term vision
   • Short-term volatility can be intense. Approach stock investments with a multi-year perspective.
3. Allocation
   • Avoid putting all your investable surplus into a single company to mitigate concentrated risk.
4. Frequent analysis
   • Keep track of each company’s news, earning reports, and sector developments.

Which is more suitable between stock SIP or mutual funds SIP?

Deciding between stock SIP vs mutual fund SIP boils down to three main factors: your knowledge, risk appetite, and involvement preference. A stock SIP can be suitable if you understand how to research companies and are comfortable with the associated ups and downs. For most individuals, especially beginners, a well-chosen mutual fund SIP investment can provide a smooth entry into the equity market without requiring extensive research or constant monitoring. Additionally, professional management by investment experts can mitigate risk and optimise return potential than do-it-yourself investing in stocks, especially if your market knowledge is not extensive.

Conclusion

The choice between stock SIP vs mutual fund SIP comes down to your investment style and objectives. Stock SIPs demand in-depth analysis and regular monitoring but can provide better return potential if your chosen stocks perform well. Meanwhile, mutual fund SIPs offer professional expertise and diversification, reducing risk and making them suitable for a broader base of investors. In short, each route has unique advantages and considerations. The choice depends on your financial knowledge, available time, and the level of volatility you can accept.

Always remember that investments in mutual funds and stocks are subject to market risks. If you are uncertain, consult a qualified financial advisor. Ultimately, informed and disciplined investing can help you move closer to your financial goals.

FAQs:

What is the meaning of frequency in stock SIP?

The frequency in a stock SIP determines how often you invest—whether monthly, weekly, or quarterly. It ensures consistency in your buying schedule and helps average out purchase costs.

What are the disadvantages of a stock SIP?

• Concentration risk if you focus on just one or two stocks
• Considerable market knowledge required to make strategic selections
• Continuous monitoring since you must track company news and fundamentals

Is it good to invest in stock SIP?

It can be, if you have a strong grasp of the companies you choose and the risks involved. Stock SIPs offer a disciplined way to invest, but you must be prepared for volatility in individual stock prices over the short term.

Is it more suitable to invest in stocks or mutual funds?

It depends on your expertise and risk tolerance. If you can do detailed research and handle market swings, direct stock investing may suit you. Otherwise, for most small investors, mutual funds through systematic investments provide professional management and diversification.

How do I start a stock SIP?

Not every brokerage platform may offer this facility, and the application process and options offered may vary. These are some of the steps that are typically involved:

1. Open an account with a trusted brokerage.
2. Select the stock(s) based on thorough research.
3. Set the investment amount and the frequency of your SIP.
4. Automate the process through your broker’s portal (if available)
5. Review periodically

Mutual Fund investments are subject to market risks, read all scheme related documents carefully. This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.