SIP in stocks or mutual funds: Which strategy offers better returns?

Choosing the right investment avenue is one of the most important decisions in long-term wealth creation. Many investors often grapple with whether to invest directly in stocks or opt for mutual funds through a Systematic Investment Plan (SIP). While both approaches can build wealth over time, they differ significantly in terms of risk, return potential, diversification and the level of involvement required from investors. Understanding these differences can help individuals make more informed decisions aligned with their financial goals and risk appetite.

This question was recently raised by a viewer on The Money Show on ET Now. Aditya Shah, founder of Hercules Advisors, explained the key differences between investing through SIPs in individual stocks and mutual funds.

Also Read | MF Tracker: TRUSTMF Small Cap Fund topped one-year return chart with 22.77% gains. Can the rally continue?


One such query came from Ramesh, a senior citizen, long-term investor and viewer of ET Now's The Money Show. He has invested in ITC Hotels, KIMS and Bharat Electronics (BEL) and wanted to know the future prospects of these companies. He also asked whether he should continue investing through SIPs in these stocks or explore better investment alternatives.

According to Shah, investing in individual stocks without the ability to monitor them regularly is not an ideal strategy.

"If you have invested in direct stocks and are asking someone else whether to continue holding them, that itself indicates direct equity may not be the right investment avenue for you," he said.

He explained that direct stock investing requires investors to continuously track quarterly earnings, business developments and company-specific risks. Moreover, the portfolio was concentrated in just three stocks, making it considerably riskier than a diversified portfolio.

Shah clarified that he was not questioning the quality of the businesses. Companies such as ITC Hotels, KIMS and BEL are fundamentally strong, with BEL having delivered impressive performance over the past two to three years. However, without knowing the investor's purchase price or overall financial profile, it would be difficult to comment on future returns or whether additional investments should be made.

Instead, he advised consulting a qualified investment adviser before making stock-specific decisions.

Mutual funds may be a better fit for senior citizens

Given the investor's age and the need for active monitoring in direct equities, Shah recommended gradually shifting from individual stocks to mutual funds.

According to him, mutual funds eliminate the burden of tracking individual companies because professional fund managers continuously monitor portfolios and make investment decisions on behalf of investors.

He also suggested that senior citizens should keep their equity allocation relatively low. "Depending on the individual's risk profile, equity should generally account for only about 10% to 20% of the overall portfolio," Shah said.

The expert believes senior citizens should avoid taking excessive risks through mid-cap or small-cap funds. Instead, he recommended large-cap-oriented flexi-cap funds, which offer relatively lower volatility while still providing equity exposure.

Among his preferred options are Parag Parikh Flexi Cap Fund, HDFC Flexi Cap Fund, Helios Flexi Cap Fund and Abakkus Flexi Cap Fund.

He noted that while newer funds such as Helios and Abakkus may have the potential to generate higher returns because of their relatively smaller asset base, the final recommendation should depend on the investor's overall financial situation and asset allocation.

Asset allocation comes before fund selection

Before deciding which mutual fund to invest in, Shah stressed that investors should first determine whether they need additional equity exposure. According to him, asset allocation based on financial goals, age and risk tolerance is more important than selecting individual schemes. Only after deciding the appropriate allocation should investors choose suitable mutual funds.

According to Shah, while direct stocks may offer higher return potential, they demand constant research, monitoring and discipline. For senior citizens and investors who cannot actively track individual companies, diversified mutual funds remain a more practical and lower-risk way to participate in equity markets.

His advice is to focus on the right asset allocation first, limit equity exposure based on risk tolerance and let professional fund managers handle stock selection through well-managed mutual funds.

(Disclaimer: Recommendations, suggestions, views and opinions expressed by the experts are their own and do not represent the views of The Economic Times)

If you have any mutual fund queries, message ET Mutual Funds on Facebook/Twitter. We will get them answered by our panel of experts. Do share your questions at ETMFqueries@timesinternet.in, along with your age, risk profile and Twitter handle