There is often a question many investors ask; if we can do a SIP in equity MF, can we not do a SIP in stocks? The answer is – yes, you can do SIP in stocks. At the end of the day, SIP is basically about rupee cost averaging. When the stock appreciates, you get capital appreciation and when the price falls you get more shares for the same investment. This logic applies as much to equity SIP as to a mutual fund SIP. But there are a few basic differences that you need to be conscious about.
- 1. Stock selection is still an issue in Equity SIP
- 2. How do you handle diversification of your holdings?
- 3. Equity-SIP will not give you the benefits of scale and measurability
1. Stock selection is still an issue in Equity SIP
If you opt for Equity SIP, you still face the problem of stock selection. You must be able to screen a large number of stocks and then zero in on the stocks that you need to include in your SIP. Secondly, you need to monitor the performance of the sector and the stock as well as the overall economy. You need to evaluate the implications of credit policy, Union Budget, Chinese devaluation and US rate hikes on your portfolio of stocks. That is a tall order and calls for continuous monitoring and the ability to interpret the plethora of economic and other triggers.
When you opt for a Mutual Fund these issues of stock selection are automatically taken care of. You have a fund manager assisted by a team of analysts, traders and sell side dealers to help him take up-to-the-minute decisions. The mutual fund manager uses a variety of fundamental tools to identify value stocks as well as technical charts to identify the right levels to enter and exit stocks. These are the benefits you will miss out if you opt for an Equity-SIP instead of a Mutual Fund SIP.
2. How do you handle diversification of your holdings?
If you opt for an equity-SIP, you need to manage your diversification of risk on your own. For example, your portfolio may have stocks in the banking, auto and real estate space. But all these three sectors are sensitive to changes in interest rates. If RBI decides to hike rates in its policy announcement, all these three sectors will be negatively impacted and that will impact your equity SIP. The benefits of your rupee cost averaging will be largely negated by the impact that rising interest rates will have on these three sectors.
That is where a mutual fund comes in handy. Due to its large portfolio size mutual fund has an automatic diversification built into its portfolio. Also fund managers closely track the mutual correlation among their stocks to ensure that the portfolio does not suffer from under-diversification or from over-diversification. This is one more advantage of going through the Mutual Fund SIP route.Recommended Read: Expert Tips for Investing in SIP to Maximize Your Returns
3. Equity-SIP will not give you the benefits of scale and measurability
These are two distinct advantages that MF SIP will bring to you. Firstly, because of its size, mutual fund is in a position to keep its operating and transaction cost at very low levels. This benefit will get passed on to you as a mutual fund holder. On the contrary, if you do an equity-SIP, your transaction cost will be quite high considering your small scale. Additionally, their size gives the mutual fund access to market intelligence, world class research as well as inputs on FII flows from dealers and traders. These are the kind of inputs you can never hope to get as an individual investor.
In conclusion, while both equity SIP and mutual fund SIP are intelligent ways of building wealth over the long term, investors who cannot spare sufficient time to the process must prefer the mutual fund route.