InvestorQ : How to decide whether I should a SIP on equity stocks or on equity mutual funds?
Moii Chavate made post

How to decide whether I should a SIP on equity stocks or on equity mutual funds?

Sam Eswaran answered.
3 years ago

The logical question is that, if a mutual fund SIP can work wonders, can a direct equity SIP too work wonders. The answer is “Yes”. The only condition is that the investor will have to spend time trying to identify the right stocks for doing an SIP. In case of equity mutual fund SIP, the fund manager takes over that responsibility. Hence an Equity SIP is only for the more informed investor who is willing to put in that higher degree of effort and take the higher degree of risk to select stocks for the SIP. Before an investor opts for an Equity SIP, here are the points to consider.

· Ensure that you are not averaging the wrong stock at the lower levels. This is equivalent to being wrong twice. Stocks may be going down due to fundamental problems with the company and that does not make a case for averaging through SIPs.

· It has been observed that an equity-SIP may outperform the equity MF SIP over the short term but over the longer term, the advantage is not really meaningful. Investors must, therefore, do a cost-benefit analysis before going for an equity-SIP.

· In fact, one option that investors must consider is to do an SIP on an ELSS fund. That way, you not only get the benefit of Rupee Cost Averaging and discipline but also get the benefit of tax incentives under Section 80C of the Income Tax Act.

· An equity-SIP can make more sense if the investment amount is larger. For smaller amounts, the benefit of diversification may be more in the case of equity mutual funds than in case of pure equities.

Most investors look at mutual funds from the point of view of handing over the fund management to experts and not get too involved in it. For such investors, an equity fund SIP is a lot better.