Systematic investing is a preferred mode that is used by investors who prefer to invest in a step-by-step manner rather than investing in one go. However, an SIP does not necessarily imply investing in a mutual fund. Investors can also buy individual stocks regularly, which is called a stock SIP.
Both strategies encourage periodic investments, but they can vary significantly in diversification, research, control, and risk. Recognising these differences can help investors decide on an investment strategy that aligns with their financial goals.
What is a stock SIP?
A stock SIP is one in which you invest a fixed sum in certain stocks on a periodic basis. An investor does not necessarily try to predict when it will be best to buy or sell shares, but rather buys shares on a schedule.
The investor selects the companies, determines the investment amount, and is directly involved in the performance of the selected stocks. This provides greater control but also requires more involvement.
Investors must examine the basics of the company, business performance, financial results, and industry conditions.
While investing regularly can lead to a significant drop in a stock’s value if the stock’s underlying company has financial, operational, or competitive difficulties. Hence, a stock SIP does not eliminate market or company risk.
What is a mutual fund SIP?
A mutual fund SIP is a scheme which lets investors invest a fixed amount periodically in a selected mutual fund. The funds are combined with investments from other investors and invested in accordance with the scheme’s investment goal.
The portfolio could contain several stocks, bonds or other securities, depending on the fund. Such diversification can help to lower the risk of investing in one company, but it doesn’t completely remove investment risk.
Every SIP instalment buys mutual fund units at the NAV of the respective unit. The NAV may change over time,d so the number of units purchased with the same investment amount may change. Investors often use a SIP calculator to make a decision.
What are the benefits and risks of a stock SIP?
A big advantage of a stock SIP is control. Instead of investing a large amount of money at once, investors can invest in companies they understand and increase their investments over time. It can be appropriate for investors who can analyse businesses and are willing to take risks on specific companies.
Concentration is a key risk, however. A company’s performance can strongly influence the portfolio if it is not performing well. Share prices may also experience rapid, unpredictable swings due to developments within the company, economic conditions and investor sentiment. Frequent purchases can build discipline but don’t make up for investing in a poor business.
What are the benefits and risks of a mutual fund SIP?
Mutual fund SIPs offer diversification and expert portfolio management. This can be a convenience for investors who may not have the time or knowledge to research companies themselves.
One benefit is systematic investing, where investors can invest on a regular basis. But mutual funds are still market-linked investments.
The value can go up or down, and there may be additional expenses to consider, including the fund’s expense ratio. A fund might also fail to perform as well as its benchmark or to deliver the performance that an investor expects.
How to get started with stock or mutual fund SIPs
The first step is to identify the amount you can invest regularly without sacrificing other expenses. For stock investment, know the trading account and demat account requirements, and the charges related to brokerage, etc.
When comparing brokers, investors may come across a demat account with zero brokerage. But don’t assume there are no overall fees and costs; zero-brokerage accounts may still include additional fees.
Before investing in mutual funds, complete the necessary KYC paperwork and choose a scheme that aligns with your investment objective, risk profile, and investment horizon.
Conclusion
SIPs in stocks and mutual funds are two ways to invest regularly, but both carry different risks and obligations. Stock SIPs offer more control but require more research and carry more risk.
Mutual fund SIPs offer diversification and expert management, but they also carry risks associated with the market and the fund. The decision should finally be based on your financial objectives, understanding, time horizon and risk tolerance, not just on past performance.
