SIP in Mutual Funds Vs Systematic Equity Plan in Stocks – Which is better?
You might be investing through SIP of Mutual Funds. Some investors would have picked-up few their favorite stocks during market corrections. Systematic Equity Plan (SEP) is where investors buy selected stocks on regular basis (monthly or quarterly). One might be thinking whether SIP in mutual funds is better or SEP in Equity would give better returns. What is SIP in Mutual Funds? What is Systematic Equity Plan (SEP) in Stocks mean? What are the major differences between SIP of Mutual Funds and SEP in Stocks? Which is the better investment option among them?
Also Read: What are the various best platforms to invest in direct plan of mutual funds?
What is SIP in Mutual Funds?
You can skip this section if you are already aware.
SIP or Systematic Investment Plan is where an investor invests a fixed amount into a specified mutual fund scheme at a definite and regular interval of time, generally weekly, monthly or quarterly (e.g. Rs 500 per month SIP). It is a planned approach towards investment which leads to regular habit of saving and creates wealth for the future. The investment is quite simple as the money is auto-debited from the bank account. Every time, when the investor invests money, additional units are purchased at the market rate and added to his account. They are allocated certain number of units based on the ongoing market rate. It is a flexible investment as one can anytime stop the investment or increase or decrease the amount.
What is Systematic Equity Plan (SEP) in Stocks mean?
Under Systematic Equity Plan (SEP) in stock, the investor invests sums of money every month on a particular date in a particular stock. It has been observed that investing in good quality blue-chip stocks over a longer period of time have helped in creating wealth for investors. As the amount invested is the same at all intervals (rounded to nearest share value amount), you get more stocks when the prices are low and less stocks when the prices are high. This way the pricing of the stocks gets averaged. One can build a portfolio of substantial number of shares of good company stocks over a period of time.
E.g. let us take Ashok Leyland which his currently trading at Rs 115 per share. You might be thinking that Ashok Leyland share has good potential in medium to long term. You might want to invest Rs 10,000 every month in that. You can buy Rs 10,000 worth of shares every month. You can buy 85 shares (rounded-off) every month / quarter if the price is at Rs 115, if the price is increased, you would buy less no of shares and if price falls, you would buy high no of shares.
ICICIDirect offers Systematic Equity Plan where one can invest up to a defined amount on a particular date. There are a few other brokers too offering this service. If your stock broker is not offering this service, you have to buy every month on specific dates on your own in your demat account.
SIP in Mutual Funds vs. Systematic Equity Plan in Stocks – Which is better?
Now, let us quickly check what are the major differences in SIP in Mutual Funds and SEP in Equity and which is better.
1) Disciplined investments every month – SIP Vs. SEP
In SIP, investors’ money is invested by the fund managers across various market caps and across varied sectors as per the investment objective of the fund. So, the NAV of mutual fund does not fluctuate as much as stock market fluctuates. Whereas SEP is exposed to high volatility in the stock market. A particular stock is bought at a certain price and next month if the conditions are not favorable but still we have to invest in the same stock.
2) Returns of SIP in Mutual Funds vs. SEP in Equity
If the market is bearish, one may get fewer returns in SEP. But in case of SIP, the fund managers invest in varied types of stocks / debt instruments, so the returns are not much affected.
3) Choosing stocks in SIP Mutual Funds vs. SEP in Equity stocks
In SEP, the stock in which the investment is to be made is selected by the investors itself. In SIP, the investors need not select the equity stocks. Our investments are managed by the fund managers who are financial experts. So, the risk in the hands of investors is minimized.
4) Tax liability in SEP and SIP of Mutual funds
Direct dealing in equity portfolio needs some buying and selling. If you are dealing with these stocks directly, there may be tax liability. However, in an equity mutual fund, this trading is managed by the fund managers internally and we are not directly affected by it. So, no tax liability arises on our part. However if you sell / redeem your equity mutual funds based on mutual funds taxation rules you need to pay income tax.
Conclusion: SIP and SEP, both are different channels of investments that allow investors to invest some of their money at regular interval. While SIP deals in mutual funds, SEP deals in direct equity investment. Mutual funds are often described as a basket of stocks or bonds depending upon the objective of the fund. They are managed by professionals who invest our money in diversified stocks and maintain a balance between debt and equity. Hence, they are not directly exposed to market volatility. On the other hand, SEP is directly linked to market volatility. If you can do your own analysis and select some of the best stock picks, you can go for SEP in Equity, otherwise, investing through SIP in Mutual Funds would always a better idea.
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SIP in Mutual Funds vs. Systematic Equity Plan in Stocks
Helped me lot to understand better between SIP and SEP
thank you srikanth
A good understanding of market is given by author
Thank you Harikishore
If you buy equity you receive emails, post , ..from the company's also periodic details about company updates, voting….giving you feel of ownership also some dividend. If you invest in mutual funds you will not get any company mail and dividend, bonus shares. …. a bad investment manager can also spoil your investment. Mutual funds which are invested in bank stocks and real estate companies may have given negative results this year. There are many fraudulent schemes and companies in market investment may be risky don't listen to millions of opinion on Net , check who can deliver results consistently
All your posts are very well explained. Thanks for beginners like me.
Thank you Shwetha, give me FB like 🙂
Excellent explanation with Example.. keep up !!
Thank you Krishna