Rs 1 crore in stocks vs Rs 1 crore in mutual funds: Why the difference matters

Deciding between stocks and mutual funds depends on your financial goals, risk appetite, and the level of involvement you prefer. While both avenues provide opportunities for wealth creation, they serve different types of investors and investment styles. So when investing about Rs 1 crore in these two separate asset classes can be tricky and decisive.

At first glance, investing Rs 1 crore in stocks or in a mutual fund may seem identical—after all, both ride on equity markets and aim for long-term wealth creation. But five years later, the difference can run into several lakhs. According to CA Nitin Kaushik, the real game-changer lies in how dividends are treated, how compounding works, and what he calls the “hidden SIP” effect.

Case 1: Direct Stocks (No reinvestment)

“Imagine you build a Rs 1 crore portfolio of direct stocks that yields dividends worth around Rs 1.4 lakh per year,” explains Kaushik. “These dividends are credited to your bank account. Unless you consciously reinvest them, the cash just sits there—almost like earning interest that never compounds.”

Over five years, assuming a 12% compounded annual growth rate (CAGR), the stock portfolio would grow to about Rs 1.76 crore. While that sounds healthy, Kaushik points out that the missed reinvestment of dividends slows down the compounding effect.

Case 2: Mutual Fund (Growth or dividend reinvestment option)

Now consider the same Rs 1 crore invested in an index mutual fund with a similar 12% CAGR. Here, dividends are not paid out to your bank account. Instead, they are automatically reinvested into the scheme by getting added back to the Net Asset Value (NAV).

“This works like a recurring deposit,” says Kaushik. “Every time dividends are generated, they buy more units of the fund—without you having to do anything.”

For perspective, that annual Rs 1.4 lakh dividend equals about Rs 11,666 every month. In a growth-option mutual fund, it’s as though you are making an extra SIP of Rs 11,666 monthly without even realising it.

The compounding advantage

When we use the SIP compounding formula with:

SIP = Rs 11,666/month

Tenure = 5 years

Expected return = 12% CAGR

…the reinvested dividends alone create over Rs 4 lakh of additional wealth.

So at the end of five years:

Direct stocks (no reinvestment): ~Rs 1.76 crore

Mutual fund growth option: ~Rs 1.80 crore

“That hidden SIP effect means you earn about Rs 4 lakh more without any extra effort, brokerage costs, or annual tax outflows,” Kaushik explains.

Key lessons for investors

“Dividends in direct stocks are paid out as income—easy to spend, and often left idle,” says Kaushik. “Dividends in mutual funds (growth/DRIP) are automatically reinvested, accelerating compounding.”

Kaushik adds: “Compounding only works if uninterrupted, and growth options ensure your returns keep building on themselves.”

Final word

In the long run, wealth creation is less about chasing the highest return and more about harnessing the power of compounding without interruptions. Whether through direct stocks or mutual funds, the way dividends are handled plays a crucial role in overall outcomes. While direct stocks give flexibility, they require discipline to reinvest payouts. Mutual funds, particularly the growth option, simplify this by automatically reinvesting, allowing investors to benefit from a silent but powerful “hidden SIP.” The lesson is clear: staying invested, reinvesting consistently, and letting time do its work are the true drivers of becoming financially secure.

This is why Kaushik advises investors to prefer the Growth option in mutual funds over dividend payout options. In the long run, the quiet reinvestment of dividends creates significant extra wealth. As he puts it, “Compounding is the eighth wonder of the world—but it only works if you don’t interrupt it.”