World Financial Planning Day 2023: How are stock SIPs different from mutual fund SIPs and which one to buy?

Financial growth is not possible without financial planning. And financial planning definitely involves investing a part of one’s earnings in the stock markets, be it in stocks and mutual funds. While traditional bank deposits are readily available, accumulating enough wealth is difficult without dabbling a bit in the markets considering how market-linked returns help to beat inflation in the long run.

As the world observes “World Financial Planning Day” on October 4, 2023, let us delve into how more investors are stepping into the world of financial investments through systematic investment plans (SIPs). Considering how not all people can invest in a lump sum or garner huge amounts to invest in one go, SIPs have garnered substantial popularity among Indian investors. Notwithstanding that SIPs allow one to invest in small installments, this method offers a structured method for wealth accumulation, thus, allowing individuals to consistently invest in various investment opportunities.

Investing via SIPs offers a plethora of advantages, including:

Discipline: Investing through SIPs instill discipline in investors by facilitating regular investments, even during market volatility. This consistency can be challenging to maintain independently but is automated through SIPs.

Affordability: SIP investments provide the flexibility to initiate investments with modest amounts, starting as low as Rs 500 per month. This accessibility makes SIPs suitable for investors across various income brackets.

Rupee Cost Averaging: One of the primary benefits of putting in money through SIPs is rupee cost averaging. When you invest in SIPs, you purchase units of a mutual fund at varying net asset values (NAVs). This means you acquire more units when NAVs are low and fewer units when NAVs are high. Over time, this averages out your cost per unit and mitigates risk.

Compounding: SIPs harness the power of compounding. As your investments generate returns, these earnings are reinvested, leading to further returns. This compounding effect can result in substantial wealth accumulation over the long term.

The idea of savings and investments is deeply ingrained in our culture, thus, explaining the increasing number of people seeking advice from financial experts.

Mayank Bhatnagar, Chief Operating Officer, FinEdge said, “Financial planning is truly the gateway to investing success. Time and again, we have seen that ad-hoc investors lack the resilience to continue investing with discipline through the ups and downs of market cycles. Investors who are financial planning-led are not just able to channelise their investments into the right instruments but are less prone to greed and fear-driven behavioural traps that commonly derail an investor’s journey. A great financial planning process streamlines your budget, defines your key ratios, helps you set the right expectations and prioritise your goals.”

The trend to rely on mutual fund SIPs and stock SIPs is growing, which is why it has become essential to verify the safety of these investment options and then decide which of them would benefit more in the long run.

Investing through SIPs in mutual funds

Mutual fund SIPs enable you to invest a predetermined sum of money in a mutual fund scheme at consistent intervals, typically on a monthly basis. With a starting threshold as low as Rs 500 per month, mutual fund SIPs offer accessibility to all income levels. These SIPs prove to be a robust choice for long-term investments, harnessing the advantages of rupee cost averaging and compounding.

Moreover, mutual fund SIPs provide a means to diversify your investment portfolio effectively.

The following illustration underlines the efficacy of mutual fund SIPs. The investment tenure has been fixed at 10 years for all the funds detailed in the table below.

Compared to stock SIPs, mutual fund SIPs are generally perceived as a more secure option due to their professional management by experienced fund managers.

Investing through SIPs in individual stocks

Stock SIPs enable you to invest a predetermined sum of money in specific individual stocks at consistent intervals. It's important to note that stock SIPs can carry a higher level of risk compared to mutual fund SIPs because you are directly investing in individual stocks. However, stock SIPs also possess the potential for greater returns than mutual fund SIPs, provided you make well-informed stock selections. Investors who possess a solid understanding of the stock market and are willing to embrace a higher level of risk may find stock SIPs to be a suitable option.

Which option is more secure?

Typically, mutual fund SIPs are viewed as a more secure choice compared to stock SIPs. The rationale behind this is that mutual fund SIPs are overseen by professional fund managers who possess the skills to diversify your investments and mitigate risk effectively.

Nevertheless, if you are an experienced investor with a deep comprehension of the stock market, you might contemplate venturing into stock SIPs. Stock SIPs hold the potential for greater returns than mutual fund SIPs, but it's important to acknowledge that they come with a heightened level of risk.

Which choice befits your needs?

Determining the appropriate SIP type for your needs hinges on assessing your investment objectives, risk tolerance, and investment horizon. If you're new to investing or prefer a more conservative approach, mutual fund SIPs can be a fitting choice. Conversely, if you possess experience and are willing to embrace greater risk, stock SIPs might align better with your preferences.

Additionally, it's worth noting that you have the option to invest in both mutual fund SIPs and stock SIPs, striking a balance between risk and potential returns. Here are some supplementary pointers to help you make an informed decision:

Evaluate your investment goals: Define what you're saving for, the required savings amount, and your investment timeline.

Gauge your risk tolerance: Assess your comfort level with risk and how much you're willing to take on.

Consider your investment horizon: Determine the duration of your investment plan.

Conduct research: Familiarize yourself with different mutual fund schemes and stocks before making any investments.

Seek professional guidance: Consult with a financial advisor who can tailor investment options to your specific needs.

Mutual fund SIPs offer diversification and the expertise of professional management, whereas stock SIPs provide direct equity exposure and the potential for superior returns. Indian investors should carefully consider the appeal of both investment types and make thoughtful decisions, taking into account their long-term financial objectives and the continuously evolving dynamics of the Indian financial market.