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Investors are quite familiar with SIP — Systematic Investment Plan — which refers to investment of a fixed sum of money at regular intervals (daily, weekly, fortnightly, monthly). This is a popular method for investing in mutual funds. In stock SIPs, instead of mutual funds, stocks are bought. These SIPs can be started with your broker. Here, a pre-specified quantity of shares that investors choose can be bought at regular intervals. Brokers such as HDFC Securities seem to allow you to fix the amount you want to invest.
The Do-It-Yourself SIP
In DIY SIP (Do it yourself SIP), as a stock SIP is often called, the investor decides which shares to invest in. Stock SIPs can also be done in multiple stocks. Investing in multiple stocks may help investors achieve some diversification and reduce the overall risk to an extent.
Stock SIPs can be paused or halted for a certain period of time. Therefore, this allows certain flexibility to the investor if he is unable to invest for a short period. In addition to this, an investor can modify the SIP created through their trading account. Investor can change the stock or quantity of the SIP. Although it is called a stock SIP, some brokers allow investments in ETFs too, since these are also traded in the exchanges.
On the cost front, active mutual funds (indirect plans) charge an expense ratio of up to 2.5 per cent. With respect to stock SIPs, the charges are the same as equity delivery segment. HDFC Securities charges a brokerage of 0.5 per cent per transaction for delivery of equity shares and with some others, there are no brokerage charges for delivery; for example, Zerodha. Transaction charges are as low as 0.00345 per cent on the NSE/BSE as per brokerage houses such as Zerodha, Upstox and 5 paisa. GST of 18 per cent (on brokerage and transaction charges) is also charged alongside.
How it benefits investors
Stock SIP is generally preferred by investors because it helps to systematically invest in stocks through ups and downs of the market and helps average out your costs. It is preferred by those investors who cannot spare lumpsum amount at a point in time, but would still like to be invested in that stock with a long-term view. Stock SIP solves the dilemma around timing the market. Investors tend to be influenced by sentiments, FOMO (Fear of Missing out) etc. and this is the main reason that we see many retail investors buy at highs and sell at lows. Doing a SIP can remove biases and bring in discipline.
The risks involved
Stock SIPs are riskier than mutual fund SIPs. Mutual funds invest in a diversified set of stocks, whereas in stock SIPs, the investor generally buys only one scrip or a few scrips, running the risk of concentration. Over a period, you may find that these stocks could occupy a sizeable portion in your overall savings.
Mutual funds are run by professional fund managers who are familiar with market behaviour and investment strategies. The investments are supported by in-house research; whereas in stocks, the individual investor must do the research on their own. There can be no partial purchase in a stock SIP and therefore amount to be committed can be considerable if the stock price is high. If you bet on wrong stock and keep doing the SIPs as it falls, there are high chances of losing money.
Stock SIP is ideal for seasoned investors who know the nuances of the market. Newbies or recent investors should stay away from it and instead invest in SIP of mutual funds.
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