There is often a question many investors ask; if we can do a SIP on an equity MF, can we not do a SIP on stocks do? The answer is you definitely you can. 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 an equity-SIP as to a mutual fund SIP. But there are a few basis differences that you need to be conscious about. Remember, an SIP is not just about rupee cost averaging. It is about a lot more. That is where the difference between an equity-SIP and a MF SIP needs to be understood.
Stock selection is still an issue in an Equity-SIP…
That is the core of the issue. If you opt for an Equity-SIP, then you still are up against 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 SIP 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 to 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.
How do you handle diversification of your holdings?
That is the million dollar question. If you opt for an equity-SIP, you need to manage your diversification of risk on your own. For example your portfolio may be having stocks in the banking, auto and real estate space. But all these three sectors are sensitive to changes in interest rates. If the 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 SIP comes in handy. Due to its large portfolio size, the 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.
An equity-SIP will not give you the benefits of scale and measurability…
These are two distinct advantages that an MF SIP will bring to you. Firstly, because of its size, the mutual fund is in a position to keep its cost of operating and transaction 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 cost of transaction 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.
There is also the issue of measurability, which is much easier and transparent in case of mutual funds. You have set benchmarks to measure their performance and there are independent agencies like Morningstar to take care of such evaluations. This ensures that not only are returns measured but also the risk is measured and evaluated. In an equity-SIP, you are at a loss to understand if the returns are commensurate with the level of risk or not. Also your judgment on the benchmarks will be arbitrary.
In conclusion, while both the equity SIP and the 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. You will be saved the effort and the worries. In the process, you will also be saved the blushes.
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