Last Updated on May 24, 2022 by Anjali Chourasiya
The term Systematic Investment Plan (SIP) offers investors the option of investing a pocket-friendly amount of their savings on a regular basis, in an investment that offers market-linked returns. The small investment size makes it affordable, and it works by compounding money in such a way that you earn interest on the interest your investment earns.
This means, the interest earned from your first investment is added to the principal amount and that money earns interest, and so on, building into a large corpus given time in the market. Additionally, the forced instalment-basis of investment also instils investing discipline over the long term.
SIPs have witnessed tremendous popularity. Countless investors have found this mode of investing to be convenient, wherein a fixed amount of their savings is directly debited from their accounts at fixed intervals. SIPs automate investments.
Another reason for the popularity of SIPs is that investors also enjoy the fruits of rupee cost averaging. This means your fixed investment amount may fetch you lesser units of your investment product in some months when market prices are high, and when the market is in a correction phase, the fixed instalment may fetch more units. If you look at the big picture, apart from the fact that market volatility is leveraged, the total cost of investment averages out when you invest via SIP.
SIPs as a concept have traditionally been privy to mutual funds. If you are one of the many investors who has experienced favourable returns thanks to your SIP mode of investment in mutual funds, you have probably wondered if the same fundamentals can be extended to stocks. Do SIPs for stocks exist? Couldn’t you buy a few shares at the same time of day every day for the next few days and get a price that is – on average – a fairly good price? But this takes a lot of conviction and time. Is there an automated facility available, like with mutual funds? Let’s explore.
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What are stock SIPs?
Stock SIPs are sometimes referred to as DIY (Do it yourself) SIP or ESIPs (Equity SIPs). DIY SIPs are more strenuous investing modes, suitable to the investor with a strong will and conviction in their investing methodology and choice of stocks. It entails manual execution of buy orders for the same stock on a fixed date every month or a frequency of your choosing. It is very easy to be held up here by behavioural biases or fear (of the price fluctuation).
In an ESIP, your broker sets up for shares with a certain amount to be purchased at a set time on a set date. The date/frequency might be monthly, fortnightly, weekly, or daily. The quantity of stocks, of course, will vary depending on how many shares you can afford with your fixed sum investment. You can set a maximum buy price to avoid buying when stock prices are overinflated. Here too, the order however is not automatically affected; rather, you only get a notification as a reminder that your SIP in stocks is due.
In both cases, you do have to watch the market to time your exit, or alternatively, you can opt for the systematic withdrawal.
Key features of stock SIPs
The key features of a stock SIP are as follows:
You set up your stock ESIP such that a fixed amount is deducted at fixed intervals – meaning that you will regularly invest a predetermined amount that will help grow your corpus over time.
Fixed investment amount
Typically, you can choose a fixed amount of capital to be invested per month. This feature can benefit you through rupee cost averaging, apart from alleviating the pressure of gaining exposure to stocks in a lump sum.
Direct debit of the predetermined amount
The lineup of transactions at the frequency that you have chosen will be set up at the start of the SIP and the amount is directly debited from your account on the predetermined date once you verify the transaction. Investors may also pause, stop or extend the SIP as desired.
Multiple stocks can be chosen for stock SIPs
This means that if you have Rs. 20,000 to invest every month, you need not choose only one stock for your ESIP. You can choose several stocks and diversify your portfolio. Also, the investor gets to choose a maximum buy price beyond which the buy will be forgone till the investor gets the said buy price. This works like a stop loss and reduces your risk by ensuring that you do not pay too high an entry price.
Benefits of investing in stock SIPs
Rupee cost averaging
You might pay an inflated share price in some instalments, but you could also buy at a discount in other months. Therefore, in the long-term, the price more or less averages out. This is why it is immensely popular amongst most investors as it provides rupee cost averaging.
Ideal for salaried class
If you want to invest in stocks but do not prefer the lump-sum method (to buy a good chunk of shares), SIP stock investment could help you pursue your financial goals.
Good option for people who have no time to watch markets
If you have the time to choose stocks but not the time to plan your entry, then you might just benefit from investing in stock SIPs because the idea of a SIP is to buy equally whether stock prices are up or down, so as to average out prices in the long run.
Factors to consider when investing in stock SIPs
A stock SIP does sound good in theory. However, SIP for stocks could go either way. Here’s why:
Stock prices fluctuate far more dramatically
The price of a mutual fund’s units does fluctuate but it is quite rare for mutual fund unit prices to experience the dramatic volatility that stock prices can often exhibit. Stocks react fast, especially when guided by some news that is followed by a knee-jerk reaction from investors.
Mutual funds mitigate your capital (and risk) across many stocks
When you put your capital in mutual funds, the fund will divide your capital across various stocks so as to keep the overall risk profile of the invested capital as minimal as possible. This means that even if there is a drastic fall in the prices of some stocks, the total hit to the overall capital might be less because other stocks or other securities might benefit at the same time.
Stock SIPs are a simple and effective way of investing in stock markets. It inculcates a disciplined investing style and protects capital from wide volatility. However since the asset is a stock, the risk is high. Through establishing a SIP in a diversified stock portfolio, you may be able to plan stock investments with considerable risk management. Consult your financial advisor before investing in any stock or scheme.