If you are a die hard fan of equity investing and buy direct stocks, here is another alternative for you. Now you can SIP in Stocks in India as well !
The famed concept of systematic investment planning (SIP) in mutual funds is now applicable to stocks as well. While the concept is exciting, you need to be aware of a few things before you buy SIP investment in stocks.
Read on to find out what.
How does SIP in stocks work ?
In the mutual fund route, you invest a finite amount of money each period which is used to buy the mutual fund units on the day of the execution. In a similar way, when you SIP in the stock market, you have the ability to invest either a specific amount each time or the ability to buy a fixed number of shares on the trigger date.
On the particular day, the shares are bought in your name at the current market price of the stock. It is as simple as that !
How much can you put in ?
Most of the brokerage houses have fixed a limit of the amount at Rs 5000/- each month. So you need to invest that amount each month to start your SIP in your favorite stock. Many brokers also allow either to invest a fixed amount or buy a fixed number of shares.
Which investment method is better ?
It is well known by now that the best way to make money in the stock market is to buy low and sell high. For the uninitiated, this means that you need to invest your money in stocks when their valuations are low and sell when their valuations are high. If you were to buy a very good stock at a very high price, then that is a dud investment. That is like buying land in the Thar desert.
Having said that, if you observe closely, if you keep buying at a fixed amount, it always is a better option than buying a fixed number of shares. That is because when the stock markets have tanked, you end up buying more number of shares when you fix your cost. See below for an example.
Suppose you were to SIP in a ticker at 4 instances and each time you buy only 100 of them. As you can see the amount you invest in varies as the price of the stock varies. Note particularly that when the price of the share dips from Rs 150 to Rs 50, the amount of money you invest also dips from Rs 15,000 to Rs 5,000.
Should you not have invested more money when the price of the stock came down ? This is why this method is not advisable.
What is advisable is putting in a fixed amount of money each month. As you can see when the price of the stock dips, your invested amount remains the same and you end up buying more shares. This concept is same as rupee cost averaging of mutual funds.
Another thing to be noted is that in the first case, you were making a profit of 17.65% while in the second case it is 39.58%. This might not be the case always though.
Last Note on SIP in Stocks
It must be noted that SIPs in mutual funds are less riskier than SIPs in the stock market. In a mutual fund, you have automatically reduced the risk by investing in a basket of stocks. So if one stock were to under perform, then the others would come to your rescue and save you the disgrace.
When you take the SIP route, you are resting solely on your ability to pick the stock well. Remember that if the stock were to underperform consistently. Then SIP or no SIP, you are not going to make money. Obviously, the best bet is then to pick a handful of stocks so that you reduce the risk. If you do that, you have made a mutual fund portfolio yourself by picking stocks !
SIP in stocks are for those who are looking for active money management in equities. And they want to be disciplined with their investing. For the dull road to riches, sit back and SIP in mutual funds.
Radhey,
Nice article. SIP’s in stocks is a strict no for me if i don’t know the company very well. Take an example of silverline technologies, imagine you were following the SIP method, the stock crashed from 4 digits to 1 digit.
Rakesh
Yeah, sometimes it is horrible to see ourselves losing money even though we know the methods to do so but the product we choose is bad.
I am sure there are so many like Silverline out there…
The safest way probably is equity diversified mutual funds.
Nice. If you are an active and can do your reasearch well, regularly, know market then it’s a very good investment plan. It’s far better than trading with close eyes…… Experts who would like to build their own MF portfolio….
For normal investors mutual fund is the best…..
is this is applicable for only blue chip stocks or it is applicable for every stock
@rajat gahoi, For every stock I guess. Check with your stock broker.
Definitely your SIPs can help in creating a long term value for your future. SIPs are an important tool to create your retirement pot. I read an interesting article on http://insight.banyanfa.com/?p=95 which explains how SIPs work.
what if I go through the portfolio of best performing mutual funds(from websites like moneycontrol.com) and then SIP directly in the stocks following the portfolio….Give me a suggestion…
if share price go up ,how you invest
Yes, SIP has this limitation that if price just goes one side Sip will not work. But it rarely happens or happens for a short period only. Stock prices will be volatile and you can aim to get an average price by investing in regular investments for long time.