Nikhil Walavalkar Moneycontrol News
SIP or systematic investment plan has seen growing acceptance among Indian mutual fund investors. One can also buy shares in similar manner – using a service called ‘Equity SIP’ or ‘Stock-SIP’ provided by many brokers. Investors can buy shares, index exchanged traded funds and gold exchange traded funds at regular intervals. “Equity SIP helps investors in spreading out their investments over a period of time, benefit from rupee cost averaging and create a sizeable corpus with small investments,” says Vishal Gulechha, Head - Equity Product Group, ICICI Securities.
SIP it Right
Like a mutual fund SIP, you can choose to invest at varying frequencies – daily, weekly or monthly. Identify a stock or a group of stocks and register for Equity SIP (ESIP). Your broker will do rest of the legwork – placing the order for the right number of shares at regular interval. For example, you may register an ESIP to buy 20 shares of HDFC each month. If you intend to buy shares of 10 companies each month, you have to register all these shares under ESIP.
This facility is broker-specific and most large brokers offer it. But each one will have its own rule book. For example, some brokers will restrict you to top 100 stocks by market capitalisation or stocks that appear in index such as BSE 100. Some brokers will offer you larger universe of stocks beyond top 100 stocks. Generally, you will be able to pick from stocks with a fair amount of volumes. However, micro-cap stocks with not much liquidity are not offered under ESIP. Brokers prescribe minimum amount of money you need to invest under ESIP – say Rs 2000.
ESIP allows you to decide how many stocks you intend to buy. If the stock price goes up quickly then you may have to invest more amount of money in each installment. To overcome this issue some brokers allow you to decide on the amount you want to invest in each installment. A broker buys maximum number of shares that can be bought using the amount you have fixed at prevailing market prices.
ESIP can be modified to suit your needs. You can change your investments, frequency of ESIP. If you are facing a temporary cash crunch do not forget to pause your ESIP. You can also cancel your ESIP. Being a broker specific facility, you may have to commit minimum purchases – typically six. ESIP also expects you to sign a debit mandate in favour of your broker to collect necessary funds from your bank account. Put simply, you have to keep the necessary amount of money in your bank account.
Is ESIP for you?
“ESIP makes the investment process more disciplined by taking out speculative component out of the investment process,” says Gulechcha. “ESIP allows investors who aren’t connected to the markets on a regular basis, to invest in the market in a disciplined manner without having to worry about timing the market.”
If you are keen to invest in stocks for the long-term by buying into a basket of stocks at regular intervals, ESIP can be a good solution. However, it comes with a set of limitations.
Watch this out
ESIP is not a sure success formula. If you buy the wrong stocks, you won’t make money. It works better for stock pickers. If you start an ESIP in a stock that has been in the downward direction, you will lose money whereas if you ESIP winning stocks such as Eicher Motors and HDFC Bank you will make money. The challenge is to identify them ahead of others. That exposes you to another issue.
No investor gets all his bets right. So, one must diversify. If you go the ESIP way, you will have to enroll for multiple stocks. “In a mutual fund SIP even with Rs 500 investment one ends up buying a diversified portfolio of stocks. However, to own a diversified portfolio of around 10 to 15 stocks one has to invest much more money each month,” points out Vishal Dhawan, Founder and Director of Plan Ahead Wealth Managers. If your broker mandates minimum ESIP amount of Rs 2,000 and you intend to build a portfolio of 15 stocks, you end up investing with minimum of Rs 30,000.
Vishal Dhawan adds, “You have to get the portfolio construction right. Sectoral exposures and stock specific exposures must be decided carefully.”
You have to track your portfolio. If a company’s fundamentals deteriorate and it does not remain investment worthy you have to sell off your existing investments and stop ESIP in that stock. Otherwise, you are exposed to the risk of permanent loss of capital. Some stocks do not remain attractive, as valuations go up. In ESIP, however, one may end up buying stocks even at higher valuation.
ESIP may have its own set of limitations but if used wisely one can supplement his existing investments. “Mutual fund SIP cannot be replaced by ESIP for most investors. But ESIP can be a good supplement to your mutual fund portfolio,” says Vishal Dhawan. Many times mutual funds steer clear of out of favour stocks. Such stocks may be value-buys. If you are keen to buy some such stocks, ESIP can be a good tool.
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