/Is it wise to use the SIP process for direct stock investment?

Is it wise to use the SIP process for direct stock investment?

By DK Aggarwal

Volatility in recent months has tested market participants’ patience. When market conditions are erratic, the systematic investing plan (SIP) mode of investing is highly recommended. Like a mutual fund SIP, direct equity investors also can use the ESIP (equity SIP) route to invest small amounts in stocks at regular intervals, thereby taking advantage of the unpredictable stock price movements. This mode can help avoid timing the market, invest through a disciplined approach and protect oneself during volatile times.

Most online trading platforms offer SIP facilities in direct equities and allow investors to fix either the amount to be invested or the number of shares to be purchased at pre-defined intervals for a fixed tenure. Without doubt, higher risk offers higher returns in financial markets.

Like a mutual fund SIP, investors should choose to invest at varying frequencies. The online system automatically executes the transaction on the date as defined by the investor. An ESIP allows investors, who aren’t connected to the market on a regular basis, to invest in stocks in a disciplined manner, helps them spread their investments over a period of time, lets them benefit from rupee cost averaging and create a sizeable corpus with small investments.

An ESIP may have its own set of limitations, but if used wisely, one can use this mode to supplement existing investments. A good thumb rule to follow here is to set expectations when one starts the investment, and review the performance of the stocks periodically. ESIP is a good option for investors, as one can get more stocks when the prices are low compared with when the prices are higher. Thus it can create a bigger corpus when the market gains, thereby helping one reach financial goals faster.

However, it is very important to make an informed decision when selecting stocks for the direct equity SIP. Remember, it does not allow automatic diversification the way a mutual fund SIP does. Investors have to pick companies that are delivering strong earnings growth with good governance and high return ratios. So, a rigorous homework would be necessary before picking any stock to invest.

DK Aggarwal is Chairman and MD, SMC Investments and Advisors.

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