Mr Ajith : Dear Sam, my brother told me to start SIP in stock market.
Sam(Myself) : Why?
Mr Ajith : He said stock SIP gave better return than mutual fund. So open a trading account and every month buy one equity share of any good company like HDFC bank, TCS, Sun Pharma…
Me : But SIP in stock is averaging and SIP in mutual fund is rupee cost averaging.
Mr Ajith : But I want more return. I don’t want to understand the concept.
Me: Ok. Let me analyse.
After few days we met and I showed him a data, which was quite interesting.
If you bought one SUN PHARMA share every month since Jan 2010 (adjusted), your investment would have earned 9% (CAGR) returns till now. The 84 shares of SUN Pharma, bought at an average price of Rs 520 a piece, would be worth Rs 0.6 lakh today including dividends.
Similarly, L& T, TCS and HDFC gave 6%, 10% and 19% respectively.
So average return of these 4 stocks SIP is 11%.
Mr Ajith : What is the return of mutual fund in same period?
Me : A systematic investment plan (SIP) of Rs 520 started in the Pharma Fund instead of Sun Pharma in Jan 2010 would be worth Rs 0.84 lakh today. 19% CAGR.
Mr Ajith: Oh my God!!! What about other mutual fund return…
Me : You will be surprised that Infrastructure fund (@ L & T), Technology fund ( @ TCS) and Banking fund ( @ HDFC) gave 23%, 15% and 23%, respectively.
The average return of these funds is 20%.
Mr Ajith : Such an eye opener message who wants to start SIP in stock.
Me : I think, you should send this message to your brother too.