InvestorQ : Is it always better to adopt the SIP approach to wealth creation?
Aditi Sharma made post

Is it always better to adopt the SIP approach to wealth creation?

Mary Joseph answered.
2 years ago

By now, it is common knowledge that a systematic investment plan (SIP) is a proven way to create wealth consistently over the long term. This is how it works! You invest a small sum of money each month on a fixed date in an equity mutual fund scheme. You do not try to time the market to decide the right NAV to buy. The idea is that there will be good months and there will be bad months. Good months will increase the value of your mutual fund holding and bad months will ensure that you get more units for the same sum invested. Before the investor makes his choice between an equity-SIP and an equity MF-SIP, he needs to ask himself the following key questions. Do I have the time and technical skills to decide which stocks to buy and which stocks not to buy; and in what quantity? How will I handle the traditional risks of equities like macro risks, industry level risks, company level risks without expert advice? Can I keep a constant tab on the investment environment, considering that the investment place is extremely dynamic and volatile? Is there any great value addition that I can bring in by doing all this research or is it best left to the expertise of the fund managers?

An investor, a mid-level IT professional, actually went a step a further and consulted his broker on whether a similar SIP could be done on direct equities too. Instead of allocating Rs.10,000/- per month to a mutual fund scheme, he wants to allocate the amount to equity shares which he feels has corrected and is therefore valuable. Mayank was advised that irrespective of whether he did the SIP on equity mutual funds or direct equities, he would still get the benefit of rupee cost averaging. However, one cannot make a straight choice between SIP on equities and SIP on mutual funds. The former is more direct and the latter is more managed. In SIP on equities, you are restricted by the number of stocks that you can select. Also the stock selection has to be done a lot more rigorously than in case of mutual fund. Lastly, stock SIP means that you need to do the diversification and risk reduction yourself whereas in case of mutual funds the fund manager does it for you.