Systematic Investment Plans: Mutual Funds Versus Stocks - ClearTax Chronicles (2024)

FAQs

Which are a better investment stocks or mutual funds explain your answer? ›

Advisor Insight. A mutual fund provides diversification through exposure to a multitude of stocks. The reason that owning shares in a mutual fund is recommended over owning a single stock is that an individual stock carries more risk than a mutual fund. This type of risk is known as unsystematic risk.

SIPs are suitable for long-term goals due to their systematic and regular investment approach, while mutual funds can cater to both short-term and long-term objectives. Cost of investment: Comparing the costs associated with SIPs and mutual funds is essential.

The risks and possible greater returns associated with stock SIPs outweigh the benefits of diversification and expert management offered by mutual fund SIPs. But if one is new to the stock market and is still getting to know its intricacies, start with a SIP mutual fund.

According to experts, if invested in SIP for a long time, it leads to faster wealth creation. E.g. Rs 10,000 investment a month through SIP for 20 years with a annualised return rate of 12 per cent can help you accumulate nearly Rs 1 crore in 20 years.

Some of the advantages of mutual funds include advanced portfolio management, dividend reinvestment, risk reduction, convenience, and fair pricing, while disadvantages include high expense ratios and sales charges, management abuses, tax inefficiency, and poor trade execution.

Mutual funds diversify investments, reducing risk, but also limit potential gains. Mutual funds are managed by professionals, reducing the need for monitoring, but investors give up control. Stocks offer higher returns but come with higher risk and volatility.

it helps in creating a higher corpus as illustrated below. If someone begins a SIP of 5000 per month for a span of 20 years, at 12% assumed annualized rate of return per annum, your total investment in 20 years is Rs. 12 lakh and the accumulated corpus at the end of tenure is close to Rs. 50 lakhs.

Once you start investing your money through SIP, there is no guarantee that the money will keep growing. The portfolio's underperformance could adversely affect the value of your investment and may result in losses.

Is SIP tax-free? SIPs themselves are not tax-free, but they can be a powerful tax-saving tool. Here is why: SIPs are a way to invest in certain mutual funds, like Equity Linked Saving Schemes (ELSS).

Why SIP is better in falling market? ›

There are benefits of increasing your SIPs including rupee-cost averaging, wherein a market slump presents an opportunity to buy more units at lower prices. This balances out your overall cost per unit and potentially boosts your returns when the market recovers.

There are very few negative of SIP which are ignorable: Date of investment is fixed and you cannot even manipulate it by one or two days. Your average entry date is delayed. Each installment of sip have different entry price, so calculating return is tough.

Lack of surplus funds: SIPs require investors to contribute funds regularly at fixed intervals, typically monthly. If an individual does not have surplus funds or a steady cash flow to invest at regular intervals, maintaining an SIP may become challenging.

Diversification. Mutual funds allow you to have a diversified portfolio in a much easier and cost-effective way. When you invest in a mutual fund scheme, the scheme based on its mandate puts your money not in companies across industries and sectors, but also across asset classes such as equity, debt, etc.

The major advantage of investing in mutual funds is that they offer diversification, which means that they invest in a variety of securities across different sectors, markets, and asset classes. This reduces the risk of losing money due to the poor performance of a single security or sector.

Mutual funds are largely a safe investment, seen as being a good way for investors to diversify with minimal risk. But there are circ*mstances in which a mutual fund is not a good choice for a market participant, especially when it comes to fees.