Difference between 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 very well said…

 

we said…

 

Client : Oho… How !!! 

 

Advisor : Let assume, 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 Kg

Total cost = 200 + 200 = 400 Rs.

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.

 

 

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…