Those who follow an investment routine often face this question when they have extra money: where to invest next. Is it better to add another mutual fund systematic investment plan or invest in stocks for potentially higher growth?
If you already have a strong SIP portfolio, direct stock investments may be beneficial. It can provide growth and diversify your portfolio. With stock investments, it is important to ensure that you understand company fundamentals and invest according to your risk appetite as they are considered highly risky.
Over 20 years, investing in SIPs or direct stocks can lead to significantly different outcomes. An SIP spreads your money across a basket of stocks chosen by a fund manager, smoothing out market ups and downs through rupee-cost averaging. Direct stock investing means picking companies yourself, with the chance of higher returns if you choose well.
Here's a simple breakdown of how each could play out:
- SIP amount: Rs 10,000
- Investment duration: 20 years
- Expected rate of return: 12%
- Invested amount: Rs 24,00,000
- Estimated returns: Rs 75,91,479
- Total value: Rs 99,91,479
For stocks, the average annual return can depend on the type of stock chosen. Historically, large-cap stocks, which are more mature and stable companies, have given nearly 10-12% average annual returns in a favourable market.
On the other hand, mid, and small-cap stocks, which are more volatile, have higher potential for growth over long durations. These stocks, historically, are know to give 15% or even more returns.
Assuming that Rs 10,000 monthly stock investment leads to 15% annual returns, over 20 years, it can amount to:
- SIP amount: Rs 10,000
- Investment duration: 20 years
- Expected rate of return: 15%
- Invested amount: Rs 24,00,000
- Estimated returns: Rs 1,27,59,549
- Total value: Rs 1,51,59,549
This shows that direct stock investment can have the potential for higher returns. However, investors must realise that stocks are highly risky investment vehicles and years of growth can turn into overnight losses depending on the company.
That is why it is usually recommended to avoid concentrating your portfolio around one stock. You can also consult an expert to create a portfolio that aligns with your broader financial goals.
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