What Are The Pros And Cons Of Stock SIPs: When the general public became aware of the power of the stock market, everyone became interested.
The sudden willingness to use the markets to become wealthy was part of everyone’s long-term goals. But, not everyone has a big stack of cash to invest all at once. Especially when it comes to the stock market, which is known for volatility.
So investing everything at once is risky and most of us don’t feel comfortable investing everything at once. What’s the best option? –
Stock SIPs. There are a good number of reasons why stock SIPs are the smarter way to invest. In this blog, we’re going to talk about that and overall, the pros and cons of stock SIPs. Read below to learn more.
Systematic Investment Plan – What Is It?
A SIP or systematic investment plan is a regular investment plan where a fixed amount of money is invested into an asset on a monthly basis.
SIPs are mostly popular with mutual funds, where investors buy mutual fund units regularly over a period of time. Popularly, SIPs are used on a monthly basis but investors can purchase units/stocks on a quarterly/six-month basis as well.
SIPs allow regular investors to set aside a fixed amount of money every month to buy securities such as stocks and mutual funds. The concept of SIP works through Rupee Cost Averaging (RCA).
In the Rupee Cost Averaging approach, you invest a fixed amount of money regularly, irrespective of the market movement. This leads to buying the same securities at different price points – Buying more units when markets are down and lesser units when they are up.
For long-term investors, it brings down the overall average cost per unit of the security.
What Is SIP In Stocks?
Now, coming to the topic at hand, Stock SIPs work in the same manner as any other SIP. The difference between mutual fund SIPs and stock SIPs is in the security itself. Here, you invest a fixed amount of money into a single stock, whereas mutual funds have you buying units.
The risk of losses is reduced due to Rupee Cost Averaging in mutual funds. So investors thought – why not apply the same concept to buying stocks?
Here, you’re not limited to buying stocks on a monthly/quarterly, or 6-month basis. As you’re investing completely on your own, you can buy stocks fortnightly, weekly, and even daily.
This is because you will be investing directly into equity, through your personal Demat account.
Pros And Cons Of Stock SIPs
The benefits of SIP in mutual funds are what brought investors to stock SIPs as well. Rupee Cost Averaging doesn’t just apply to mutual funds. It extends to stocks as well. But, there are downsides to this strategy as well.
Pros Of Stock SIPs
Let’s take a look at the important pros and cons of stock SIPs. First, we’ll take a look at the plus side of stock SIPs.
1. Accessibility
Imagine you’re in the year 1990. You decide to buy stocks of ABC company every week with a fixed amount of money. Your stockbroker would be irritated regularly placing the same order over and over again.
Today, investors don’t need to face any of the hassles. Every brokerage allows you to follow any trading/investing strategy, at your convenience. Another bonus –
Investing doesn’t have a minimum order value, so you can invest as little as you want.
2. Affordability
Some stocks tend to be expensive, so it becomes a little difficult to buy more shares at once. If the company is aware and they split the stock, it’s good news.
If not, then stock SIPs are the way to go. For a lump-sum investment, the stock might be expensive. But through SIP, you can accumulate shares in the long term.
3. Automation
Technology has certainly changed how we invest today. With user-friendly brokerages such as Zerodha and Angel One, investors can even buy shares after the market has closed.
Another advantage is automation. There might be times when we forget to invest. You can automate your orders on your brokerage platform so you regularly invest. This way, you never have to miss a SIP payment.
4. Risk And Cost
Consider the amount of risk you hold when you invest all your capital, at once into a stock. With a single swing in price, it could wipe out your capital.
Unfortunately, this could happen to anyone, with no prior warning. If you take the SIP route for the same stock, your losses would be significantly lower, and it would give you an opportunity to rethink your investment strategy.
In terms of costs, stock SIPs have the advantage over mutual funds. Since you are investing directly, you do not incur any AMC fees and exit load charges.
Fund management costs drop to zero as you are directly investing. You will, however, have to pay for brokerage on your investments.
Cons Of Stock SIPs
After having read about the pros of stock SIPs, Let’s have a look at the cons of stock SIPs.
1. Picking The Right Stock
A common misconception is that changing strategy somehow changes the fate of your investment. The truth is, a SIP doesn’t work that way. It just changes the style of investing but does nothing to alter the fate of your favourite stock.
Let’s take an example to understand it better –
Person A invests a lump sum of money, say ₹1,00,000 in company ATAT. After a period of 6 months, he learns that the company has been consistently underperforming. This reflects in the stock price and he loses about 10% of his investment. Lesson learned.
Person B invests in the same company ATAT but in SIP form. Companies release their quarterly results every 3 months, and with each bad quarter, the stock price falls. This is due to the company’s bad performance.
But since Person B has taken up the stock SIP route of investing, he buys more shares for the same amount of money. It didn’t in any way, change the fate of the stock. At max, Person B might have made a smaller loss than person A.
This shows that the Stock SIP method of investing doesn’t change anything about the stock itself. Picking the right company matters in a big way.
2. Entry & Exit Timing
Timing plays a big factor in stock SIPs. You can lose money even with fundamentally strong stocks if your entry and exit are bad. A common example of this is investors who buy stocks at their 52-week high, and are forced to sell them at a discount later.
The price of a stock and the value of a stock are two different concepts. Price denotes the current market price of the stock in the market. Value, on the other hand, denotes what the stock is truly worth.
Your entry into the stock has to be timed such that the stock is undervalued to its price.
Similarly, you have to time your exit as well, such that you sell your stocks, make profits, and observe its fundamentals all before the price drops from its peak.
3. Lack Of Diversification
A fact that retail investors overlook is the difference between stock SIPs and mutual fund SIPs – The Asset Management Company. On a regular basis, fund managers rebalance the fund, adding and removing stocks from the scheme.
The fund itself is diversified, so extreme volatility of one or two stocks is understandable and expected. With diversification, comes lower risk and moderately safer returns.
But what if you’re the investor holding those stocks that are volatile? Especially since your entire portfolio is concentrated in one company.
This strategy doesn’t account for diversification and so, This is just one of the questions you must ask yourself before starting a stock SIP.
Also Read: What Happens If You Miss SIP Payment? Consequences & More!
In Closing
There are a lot of factors to consider when starting a stock SIP. One of them is the fact that your portfolio isn’t managed by an AMC so you hold all the risk and reward.
We hope you’ve learned the pros and cons of stock SIPs. For more such content, sign up on FinGrad. Happy Investing!
Tags: Pros And Cons Of Stock SIPs, Is it good to do SIP in stocks?, What are the advantages and disadvantages of SIP?, What are the disadvantages of SIP?, Is stock SIP better than mutual fund?, Why should you invest in SIP?, When should you invest in mutual funds through SIP?, SIP advantages and disadvantages, Disadvantages of SIP, Benefits of SIPs, Benefits of SIP in stocks