SIP in stocks or SIP in mutual funds?
Lately, we have seen a rise in the Demat accounts, which suggests that the focus of investors is shifting more towards direct equity investments from mutual funds. Further, now, one can systematically invest via a systematic investment plan (SIP) in stocks as well. So, in this article, we would discuss whether one should opt for SIP in a single stock or go for SIP in mutual funds.
How SIP in stocks differ from that of MFs?
In mutual funds, people often do SIP in a portfolio of stocks, while in stocks’ SIP; you need to do SIP in a single stock. Therefore, while investing in mutual funds, by default, you are enjoying the benefit of diversification. However, to enjoy a similar benefit from stocks' SIP, you need to diversify your SIP in various different stocks. This will ensure that your investment is free from concentration risk.
Not just that but you should also have the knowledge, experience, and time to manage your individual stocks as in when to enter or exit from a particular stock. Hence, for a retail investor or even for HNIs, SIP in stock is way riskier than it is in mutual funds.
So, does it mean that it is not recommendable to invest via SIP in stocks? Well, that’s not the case. You can invest via SIP in stocks during high volatility as this would ensure that you buy less quantity at a higher price and more quantity at a lower price. However, you should indeed have adequate knowledge to time your exit properly because ignorance of this is enough to ruin your entire portfolio.
Also, one should remember that not all, specifically, retail investors have the ability to buy each stock and build a portfolio. For stocks like MRF, Bosch, Eicher Motors, Abbott India, Nestle, etc. you have to pay a higher price to own its single stock. Hence, for such investors, it is always better to invest in a diversified equity mutual fund. And those who wish to invest in stocks via SIP can always take the help of a SEBI registered investment advisor (RIA), who can help you to have a diversified portfolio of stocks.