Stock SIPs: Does It Work?

Are you looking at regular investment in stocks? Do you want an investment that offers inflation-beating returns over some time? You may consider investing in stocks through the systematic investment plan or SIP. It works similarly to mutual fund SIPs, where you invest small amounts of money regularly in mutual fund schemes of your choice. You can invest in a single stock or a basket of stocks, depending on your risk tolerance. Moreover, brokerage firms may allow you to start a SIP in any stock, or they may offer a fixed set of stocks. However, should you opt for SIP in stocks?

What is SIP in Stocks?

You have Stock SIP as an easy way of investing in stocks. It helps you invest fixed amounts of money periodically in stocks of your choice. You have brokerage firms allowing you to invest in stocks through SIPs. It helps you either set up a fixed amount or purchase a fixed number of shares at regular intervals, such as weekly, fortnightly or monthly.

You will find many investors putting money in individual stocks through SIPs. It helps you gradually build positions in your preferred stocks if you can’t invest a lump sum amount. For instance, you could choose the monthly Stock SIP where you specify the monthly investment amount. You have the brokerage firm placing the ‘buy’ order for a predetermined number of shares based on your monthly commitment. 

Should you try SIP in stocks?

You may invest in stocks through the SIP only if you are a savvy investor who understands the stock market. Moreover, brokerage firms offer this facility to help you systematically buy stocks and average your investment cost over some time. It helps if you invest in a basket of stocks rather than single stocks through SIP to avoid company-specific risk. Moreover, many brokerage firms do not allow penny stocks through SIP and offer the shares of only well-established companies to mitigate risks. 

You may invest in equity funds through SIP if this is your first time in the stock market. It offers a portfolio of different stocks and is safer as compared to Stock SIPs. Moreover, you must invest in mutual funds or stocks to achieve your investment objectives based on your risk tolerance. 

Investing in Stocks through SIP is riskier than mutual fund SIPs. You must know when to exit the stocks to maximise your returns. Moreover, you must have the skill and the time to pick the right stocks. Otherwise, you could lose money even if you invest in stocks systematically through the SIP. You are better off investing in an equity mutual fund where the fund manager takes care of the investment in line with the fund’s investment objectives. 

You may consider first investing in equity funds through the systematic investment plan. It helps if you use surplus funds to build a concentrated investment in 10-15 stocks over some time through Stock SIPs. Moreover, you must regularly monitor the stock portfolio for changes in company fundamentals. Otherwise, you could suffer a heavy loss if you continue investing in the wrong stocks. 

How to pick stocks for SIPs?

  • You must pick the right stocks for the systematic investment plan. For instance, you may start Stock SIPs in large-cap companies rather than mid-cap and small-cap firms. These are established players with a track record of performance over some time. 
  • You must regularly monitor the companies on various parameters such as earnings and management capabilities. It would help if you selected stocks of companies that have an economic moat. It is the ability of a business to maintain a competitive advantage over its competitors to protect its market share.
  • It will help if you plan your exit from stocks closer to your financial goals. For instance, you may consider booking profits when you are near your long-term financial goals.

You must invest in stocks through SIP only if you are an aggressive investor who understands the stock market. It helps if you have the knowledge and the time to select the right stocks. Otherwise, you could opt for SIP in equity funds if this is your first time in the stock market. 

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