Investing directly in the stock market through stock systematic investment plans (SIPs) did not gain much traction among Indian investors. But it can still appeal to newbies in the stock market. Stock brokers could allure them into stock investing through SIPs saying that stock SIPs offer a disciplined approach to purchasing stocks at constant intervals.
But what is stock SIP, and should you go for it? We explore.
A stock SIP is a standing instruction to buy stocks of a particular company systematically on a regular basis.
In stock SIPs, investors select the stock, payment frequency, and the SIP duration.
There are two ways to do stock SIPs. One can buy fixed stocks per transaction by specifying how many shares of a particular company to buy per investment. The money deducted from your bank account will vary every time due to changes in the stock price. Investors may also choose a fixed investment amount, in which case, the number of stock would vary based on how much you can buy through your investment.
Stock brokers may advocate for SIPs in stocks saying that it mitigates the risks of equity investments by avoiding the necessity to time the market through rupee cost averaging and entering the equity market at various price points. In that sense, it is similar to SIPs in mutual funds.
However, unlike mutual funds which diversifying investment across multiple stocks, stock SIPs concentrate on a particular stock, thereby exposing investors to a higher risk.
Says Swapnil Kendhe, a Securities and Exchange Board of India (Sebi)-registered investment advisor (RIA): “Stock SIP makes sense only for investors with a crystal ball to predict individual stock returns in the future. Others should strictly avoid it.”
Here are some of the disadvantages of stock SIPs
Indirect Costs: Unlike mutual funds, direct investing in stocks through SIPs require a dematerialised and trading account, which will be accompanied by brokerage charges. These expenses will accumulate over time, and can impact overall returns.
Lack of Guidance: Unlike mutual funds, which are managed by professional fund managers, stock SIPs lack such a professional oversight. Investors need to independently navigate the market, which could be challenging for newcomers. Selecting one stock that beats the market even from broad indices like Nifty 50 cannot be foolproof for seasoned investors.
Wrong Exit Timing: Even if you have picked a stock that gave good returns, the stock can take a downturn over time. During such negative market phases, the SIP will continue automatically, till the SIP maturity. This can cause huge losses to your portfolio over time.
Entry Timing: Efficient entry timing is important to avoid overpriced stocks. Further, when a stock is under-priced, it presents a buying opportunity. Also, market corrections could present such buying opportunities. Effectively utilising such scenarios demands considerable time and effort from fund managers or seasoned investors. This is, unfortunately, not present in automated nature of SIPs.