Introduction
SIPs are disciplined investment strategies that offer investors techniques of building wealth over time given their regular small investment amounts.
SIPs can be applied in two major categories:
Employment Balanced Benefit Funds investment plans and Investment Funds investment plans.
As both are seeking to create wealth, the strategies, model, and consequence differ significantly.
In this article we are going to discuss what is Stock SIPs and Mutual Funds SIP; it features, things to consider, benefits, samples, tax treatments as well as the differences between Stock SIPs and Mutual SIP.
Definitions
Stock SIP
- Stock SIPs means that the investor can be able to invest in the shares of a particular company at short intervals. It is a direct equity investment strategy that is ideal for those who would wish to have long term investments in the stocks.
Mutual Fund SIP
- SIP in Mutual Fund means the regular investing of a fixed sum in a mutual fund scheme of various types like equity funds, debt funds or hybrid funds etc.
Features
Stock SIP
- It gives direct opportunities for the selection of individual securities to be invested in.
- Orders can be made for varying Types of investments; daily, weekly, or monthly.
- Qualified investors select individual stocks or utilize basket available through brokers but selected prior to the investor’s purchase.
- Higher potential risk and return than mutual fund companies.
- Not professional management of funds.
Mutual Fund SIP
- It provides an opportunity to invest in a diversified portfolio of securities offered by professional fund manager.
- Expenses are diversified across a number of appeals or stocks; thus, minimizing the risks incurred.
- Number of funds are available to select (like large cap, mid cap, small cap, sector funds etc.).
- Ideal for novices because of enormous administration by authorities.
- Works under the regulation of SEBI for more transparency.
Factors to Consider
Stock SIP
- Market Knowledge: Incorporation of stock market and competing companies’ knowledge.
- Volatility: There is a high risk involved in stock prices especially the price volatility for which only special investors with bearing should venture into.
- Research: This work requires periodic research to discover new and monitor the existing stocks.
- Brokerage Costs: With frequent buying, one is likely to be charged high brokerage fees.
Mutual Fund SIP
- Fund Objective: Ensure that the goals of the fund accord with your financial goals and or plans.
- Risk Appetite: There are funds of higher risk known as equity funds and those of moderate risk also known as debt funds.
- Expense Ratio: And, cost of fund management should not be overlooked.
- Fund Performance: Consider the track record, and particularly the stability, of this investment.
Advantages
Stock SIP
- Customization: It is important to investors that they can choose individual stocks, so that they can fashion their own portfolio.
- Wealth Creation: These types of stocks appreciate over long period and yield high returns to the end user.
- Control: Offers firsthand authority and management of the stock investments.
- No Lock-In Period: It containing risks of liquidity: Stocks can be sold anytime.
Mutual Fund SIP
- Diversification: Reduces risk to a company or an individual by investing in different types of securities.
- Professional Management: Portfolio turnover is done by experienced fund managers.
- Affordability: Because justly a bit of the amount may be saved at a time; so starting is easier.
- Compounding Benefits: Profits are escalated, which further guarantees high yields in the coming periods of the business cycle.
- Convenience: Easy to set up and monitor.
Examples
Stock SIP
- An investor wants to invest ₹10,000 on TCS shares on monthly basis for the period of five years.
- Purchases it is easy to build up a quantity of TCS shares while also avoiding getting caught in high volatility periods in the market.
Mutual Fund SIP
- An investor vests a SIP in equity mutual fund such as SBI Blue-chip Fund where the monthly investment is ₹5000.
- In the long run, the investment increases in tandem to market returns, while spreading out the risks that exist between the various stocks in the fund’s kitty.
Tax Implications
Stock SIP
- Short-Term Capital Gains (STCG): Short term trading profits, which are profits arising from stock sold within one year, are subjected to a tax rate pf 15%.
- Long-Term Capital Gains (LTCG): Those profits more than ₹1 lakh derived from stocks held for more than one year are subject to 10% tax rate.
- Dividend Income: Till recently dividend income also used to attract a tax as per the income tax bracket of the investor.
Mutual Fund SIP
Equity-Oriented Funds:
- STCG (less than 1 year): Taxed at 15%.
- LTCG (more than 1 year): To be taxed at 10 percent where the gains are more than ₹ 1 lakh.
Debt-Oriented Funds:
- STCG (less than 3 years): Taxed at the investor’s income tax slab rate.
- LTCG (more than 3 years): Currently attracts a tax of 20% with full indexation of its benefits.
- Dividend Income: Exempt subject to the applicable slab rate.
Key Differences
Feature | Stock SIP | Mutual Fund SIP |
| Investment Type | Direct equity investment | Pooled investment in mutual funds |
| Risk Level | Higher risk | Moderate to low risk |
| Diversification | Limited (individual stocks) | High (multiple securities) |
| Management | Self-managed | Professionally managed |
| Liquidity | High (stocks can be sold anytime) | Depends on the fund’s structure |
| Knowledge Required | High | Low |
| Cost | Brokerage fees | Expense ratio and fund fees |
| Taxation | Based on individual stock transactions | Based on mutual fund category |
Conclusion
Stock SIPs and Mutual Fund SIPs prove as efficient investment tools for different kind of investors. Stock SIPs are suitable with individuals who understand the stock market and those who can afford to take high risk.
On the other hand, Mutual Fund SIPs are suitable for the novices or those investors who want to invest by adopting a diversified approach with the help of professional experts.
Unfortunately, the choice of SIP depends on the financial goal, risk appetite, and the understanding of the market.
It is through this those investors are able to identify the Differences and the usefulness of each of them in the differentiation process, and on this basis, it is possible for investors to work towards the creation of a Rock-solid wealth creating Investment Portfolio.
Frequently Asked Questions
1.Do you require investment in a SIP in mutual funds?
Yes, SIPs (Systematic Investment Plans) are a good way of investing in mutual funds since it involves disciplined mode of investing through regular small amounts. They reduce risks of market fluctuations through Anal of cost in rupee and have an element of wealth building for the long term.
2. Is SIP a good investment?
SIPs are beneficial, especially for those investors who wish to build capital over a long term. They are cheap, easily maneuverable and best for attaining long term hurdles with lesser or no impact of fluctuation.
3. What are the consequences associated with declaring tax on SIP in mutual funds?
- Equity Funds: SIPs which have been held for more than 1 year are charged 10% in the form of LTCG if the gains exceed ₹ 1 lakh, while those which have been held for less than 1 year are charged 15% as STCG.
- Debt Funds: SIPs sold over 3 years attract LTCG tax at 20%, and gains from shares sold within 3 years are taxed according to the investor’s income tax rate.
4. What is SIP in equity stock?
Unlike mutual funds, which invest in a pool of securities, a Stock SIP is a regular investment in individual securities. It allows you to invest a fixed amount or, equivalently number of shares at certain time intervals that can help curb reckless usages in the stock of equities.
5. Why is there more risk involved in SIPs in mutual fund?
Mutual fund SIPs carry risk due to:
- Market fluctuations, they affect the NAV (Net Asset Value).
- Specialist or single industry funds being dependent on industry specific factors.
- Shortcoming in the fund’s portfolio performance