stock SIP: Mutual fund SIP and stock SIP – which is the safer bet? Arnav Pandya explains


Arnav Pandya, Founder, Moneyeduschool, says “in a stock SIP, if you want to get that same kind of benefit as a mutual fund SIP, you will first of all need to have multiple stock SIPs to get a diversified portfolio. Second is that you need to do that effort every month. You have a facility wherein your brokerage house itself gives you some facility to do an SIP but still you need to be very careful in terms of how you are going about it. So, in terms of risk, there is a big difference.”

Everybody who is not directly investing in the stock markets finds the SIP way quite convenient. Firstly, what is your take on the mutual fund SIP as well as stock SIP route and how should one go about it? In terms of the returns, what should be the expectation and which one is a safer bet?
If you look at the basic term of systematic investing, the whole concept is that you put in an amount which is similar on a regular basis with the end result that over a period of time due to variations in the equity prices, you will get an average cost. Now, as far as mutual funds are concerned, we are very familiar with the entire SIP process where every month, for example, you put in a specific amount and then you get units against this. But the main important factor when you do an SIP in a mutual fund is that you are getting exposure to a complete portfolio by investing in the units, so that is point number one.

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Now, when you try and replicate the same thing with respect to a stock, the basic concept remains the same, which is that every month, you say I will put aside a specific sum and with that, instead of say a mutual fund unit, I am going to buy a particular stock. Now, the first difference that you will see here is that unlike a mutual fund, which can issue you units in decimal places and which will use up your entire money, you will need to do a proper calculation in terms of which stock you are buying and what is the price for it.

For example, say you are investing Rs 5,000 a month. Now, if the value of a stock price is say 2200, what will happen is that you cannot buy a fractional stock in India, so you will have to buy two shares of that particular company and Rs 600 will remain uninvested, so that adjustment you will need to make, that is the first thing.

The second and most glaring difference that you will see is that instead of a diversified portfolio when you do a stock SIP, you are getting exposure to just a single company. So, there is no diversification and your risk remains attached to what the company is doing and how it is performing. And the third thing which also you will find is that when it comes to a mutual fund SIP, you put it on automation mode.

In a stock SIP, if you want to get that same kind of benefit, you will first of all need to have multiple stock SIPs to get a diversified portfolio. Second is that you need to do that effort every month. You have a facility wherein your brokerage house itself gives you some facility to do an SIP but still you need to be very careful in terms of how you are going about it. So, in terms of risk, there is a big difference. In terms of how your money is utilised, there is a big difference and it is very clear that for a lay investor in terms of process, the mutual fund SIP route is far easier than doing it on a stock.

When it comes to stock SIPs, when we host the query segment for the stock specific viewership, people always ask whether or not it is the appropriate time to average the particular counter on some stock where they are losing money currently. If somebody has a long-term view, then how should they go about it as stocks are quite volatile?
The first thing that any investor needs to do is differentiate between why they are doing the stock SIPs. So, stock SIP is not averaging out an investment just because the price has fallen. There are two situations which investors face. One is where they have already made an investment. They find that prices have gone down, but think that the company is a good one or they hope that the company is a good one and it will give them returns.Then they say that if that is the case, I will buy at a lower price so my average cost comes down, that is a one off thing. Now, when you are looking at a stock SIP, before making the investment itself, you are very clear that you want to build a particular amount of investment in that particular stock or company and because you do not have the money upfront or you want to spread out the risk, what you will do is that maybe it will take you one year, one-and-a-half years, but slowly every month by investing an equal amount you will accumulate that amount with the hope that because you think this is a good long-term bet, over the years this amount which you have invested through the SIP will multiply over a long period of time.

Now, that should be the goal of doing the SIP: that because you have identified a very good company, you expect benefits to come over a longer period of time because of the various plans or the way the company is running its business, it is going to do well. Then with that frame of mind you are going in and setting up a stock SIP.

This is not an opportunistic move, this is a planned strategy and your goal is to have a larger amount of shares which you have because you do not know today, whether over the next three months, six months it will come down or go up. Which is why the stock SIP will help you average out the cost but the basis or the reason behind doing it has to be very clear and it is a planned strategy.

If somebody has to start with stock SIPs, then between the large, mid and smallcaps, how should they go about it? A lot of investors find it difficult to go ahead and find a good stock where they can have this particular strategy? Any advice on the stepping stones for this journey?
Ideally, stock SIPs are more suitable for largecap stocks. The reason behind this is that largecap stocks as a rule are less volatile. It is not like that they are moving up 30-40%, then coming down 30-40%. Mostly largecaps are the one where you believe that these companies because they are in a specific business segment or sector where they are the market leaders in their space, they will do well. That makes investors want to go and buy the company and which is why they start doing the stock SIPs.

But in some cases, if your portfolio demands it and if you are taking a midcap exposure, then maybe even a stock SIP in that segment is also done. But overall, what an investor needs to do is that they need to be very clear of what kind of exposure they are having in their portfolio. And why is this important because it is not just about one single investment and whether it will do well or not. Anytime an investor is looking to invest, they need to have a portfolio outlook and that portfolio outlook needs to take into consideration their exposure across various market caps.

It should not be that just because you feel that there is one company in one sector which is going to do well, you have started investing in that particular company only. It has to be in balance in terms of the exposure because how much you put in a stock SIP is also important. How many companies you select for these kinds of SIPs is also important. All that needs to be taken into consideration by looking at your portfolio and the various exposures that we have. That will determine how you go about this process.

If somebody is looking to go ahead with both these routes – mutual fund SIPs as well as stock SIPs – then how can they place their money in terms of bifurcation? Can they just go ahead with a 50-50 ratio? I understand that it is a very individual sort of a call, depending on their risk profile, depending on their return expectation as well as the goal they want to achieve with the investments but as a thumb rule, anything that they can follow in these lines?
As you said, obviously, how much money to allocate where, depends on an individual’s particular situation. But you have to understand one thing that you should not be replicating it. Like, for example, you have to select mutual funds to do an SIP when you cannot do the same by investing in stocks. Like, for example, say in many cases, you might already have an exposure to largecaps through one way or the other. So if you want, say, a larger exposure to the midcap segment, then maybe you will be doing a mutual fund SIP.

On the other hand, if there are some investments which are not likely to be made possible by a mutual fund SIP, then you might want to go and do a stock SIP. For example, you might believe that one of the largecap companies which you feel have a bigger potential, is not adequately being invested into by the largecap or the flexi cap funds which you have. So, if the exposure in those funds is extremely low or virtually non-existent, then looking at that, you might want to do a stock SIP in that particular stock because you do not have an exposure to that in your portfolio. This kind of balancing is required. The logic is that do not replicate what you already have.

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