Just as mutual fund systematic investment plan (SIP), you can choose a regular dose of investment to park your money in stock SIPs. Instead of investing money in one go, you can stagger your cash infusion in regular intervals i.e., weekly, fortnightly and monthly.
As far as mutual funds are concerned, this is a common method but in terms of stocks, this is not. In this method, investors can buy a predefined number of shares at regular intervals. Some brokers such as HDFC Securities or Zerodha enable investors to set a fixed amount that they want to invest.
One can set up stock SIPs on platforms such as Zerodha where investors have two options - either to choose the existing basket or create a new one. Investors can use all the mutual fund like facilities such as systematic investment, systematic withdrawal and systematic transfers.
Diversity it offers
Although one might wonder that unlike mutual funds that offer inherent diversity, stock SIPs don’t usually offer it. However, it is not completely true.
Even stock SIPs can be done in varied stocks. Investing in a range of stocks can help investors achieve diversification and cut down the risk to some extent, albeit not in entirety.
Just as mutual fund SIPs, stock SIPs can be paused or halted for a certain period of time. Another factor of distinction lies in the fact that mutual fund schemes are mandated to carry out intensive research before they decide the allocation of stocks and that of sectors.
However, in case of stock SIP, this responsibility is that of investors who are supposed to short list the stocks as well as sectors they are investing into.
Also, there is no option of buying a small portion of stocks. So, if a stock price is unusually high, investor will have to spend a particular amount of money to be able to buy the shares.
Averaging out of cost
SIPs of any kind, be it stock or mutual funds, are preferred by investors because they provide rupee cost averaging. In other words, you can invest in stocks systematically through ups and downs, enabling you to average out your total cost for the stock.
“When you buy stocks in the SIP way it will also work on the rupee cost averaging method and you can average out the cost price. The risk here is only that when the particular share’s price keeps on declining, we keep on putting more and more money as we get emotional with the stock. So, to average out, we just keep on bumping money but such emotional decisions get us in big trouble,” says Preeti Zende, Founder of Apna Dhan Financial Services.
Not hunky dory
But it is vital to note that it is not all hunky dory. One must remember that stock SIPs – unlike mutual fund SIPs – are not as flexible as mutual fund SIPs. As we know SIP is merely a mode of investment and it doesn’t change the asset class we choose to invest in.
Regardless of what investment method we have chosen, the difference that lies between a stock and a mutual fund continues to exist. A stock can be sold in the stock market at the price that prevails during the time of sale, whereas mutual fund units — just as a basket of stocks — are sold via asset management company (AMC) at the existing NAV (net asset value) of the scheme.
So, it is advisable to be aware of the pros and cons before investing in a stock SIP — just as any other investment.