March 20, 2017

Stock SIP vs Mutual fund SIP

Client : Hi Mr. Advisor , I want to know the difference between stock SIP vs Mutual fund SIP . Which one is better & why ? Can u explain both the concepts ?

Advisor : Yes sir surely. Why not.

Well, stock SIP is averaging and mutual fund SIP is rupee cost averaging.

Albert Einstein quote...
Compound interest is the eighth wonder of the world.

Our quote...
SIP is ninth wonder of the world.

Client : Oho.. How !!!
Advisor : Let say, you want to buy 10 Kg. apple every month....
Price of apple in January - 20 per kg. Your expense is Rs.200, right?
Price of apple in February- 40 per kg. Your expense is Rs.400
The average per kg cost is 20 + 40 = 60 / 2 = 30 per kg.

This is average and your stock SIP is working on same principle.

Client: Then what is rupee cost averaging?

Advisor : Suppose your budget is to spend Rs. 200 per month on apple. No matter what is the price.

Price of apple in Jan - 20 per kg, so you can buy 10 kg. (200/20)

Price of apple in Feb - 40 per kg. So you have 5 kg. (200/40)

Now tell me the average of per kg apple.

Client: Same 30 per kg

Advisor : No.

Number of kg you bought = 10 + 5 = 15
Total cost = 200 + 200 = 400
Average cost = 400 /15 = 26.66

Now in the above example as stock SIP , you bought of apple is averaged at Rs. 30. per kg. & as Mutual Fund SIP , your buying cost is averaged at Rs. 26. 66 per Kg. for the same apples.

This is Rupee cost averaging. Mutual fund SIP is working on this principle.

Client: oh great!! So every time our cost per unit is less than its avg. Now I fully understood rupee cost averaging. It's awesome..

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