We’ve known and have read plenty on mutual fund systematic investment plans (SIPs). Now, you can also start SIPs by directly buying equity shares. The present market volatility is an opportunity for savvy investors to make some long-term gains. Some brokerages offer stock SIPs for regular investments in shares.
How does it work?
A stock SIP is just a way to invest systematically. Instead of buying units of mutual fund schemes, you invest in shares. Once you decide how much money you’d like to invest, your brokerage firm places a ‘buy’ order for a predetermined number of shares worth your monthly commitment. Brokerage houses offer daily, weekly and monthly SIPs.
You can choose to buy more than one company’s shares via stock SIPs.
Some brokerages allow you to specify the maximum buy price. You can define the number of instalments and keep your broking account funded to that extent. Or you could just give a mandate to debit funds from your account to buy shares.
Some brokers may not allow you to buy penny stocks via SIPs. To mitigate risks, some brokerages suggest stocks of only well -established large and mid-sized companies.
How much does it cost?
In most cases, the minimum investment per instalment is kept very low – Rs 100 or Rs 500 depending upon the brokerage. You can pause, stop or even extend your stock SIP. You are charged the brokerage for every trade that gets executed. Brokerages such as ICICI direct, HDFC Securities and Sharekhan offer stock SIPs.
The Nifty has lost 27 per cent over the last three months due to the fears of a prolonged economic slowdown arising out of the COVID-10 lockdown. “Investors cannot spot the bottom and it is good idea to use the stock SIP to accumulate quality stocks in a staggered manner,” says Gaurav Dua, head-capital market strategy, Sharekhan. “The markets are expected to remain volatile in near term and investors will get an opportunity to slowly build their portfolios,” he adds.
A good strategy would be to have your basic mutual fund SIPs in place first. Then, if you have a surplus to invest in equities, you can consider, say, building a concentrated bouquet of 10 to 15 stocks through stock SIPs.
“You need a minimum of 10 stocks spread across sectors of companies that have established businesses, debt-free balance sheets, high return on equity and relatively low valuations,” says Vikas Gupta, Chief Investment Strategist, Omniscience Capital.
Are stock SIPs risky?
Yes, they are if you do not analyse or regularly keep track of the underlying companies. To an extent, buying at regular intervals reduces the market timing risk. Says Vinod Jain, Principal Advisor, Jain Investment Planner, “there are no ‘buy-forever’ stocks. You are exposed to company specific risks and you should know when to exit. If you do not know to manage it actively, you should seek advice.”
Too much exposure to just one stock can hurt you if the share underperforms
Stock SIPs are riskier than mutual funds. You run the risk of underperforming the broad market or even losing capital.
“Never ever go for a single stock. If you happened to buy a Jet Airways or Yes Bank, no matter how diligent you are with regular investments, you won’t make money,” says Vikas Gupta. Diversification helps when you build a portfolio.
Should you invest?
If you are sort who can analyse company reports and understand the dynamics of businesses, you can consider stock SIPs. If you are a first-time investor, we suggest you stick to mutual fund SIPs first before getting adventurous.