Why Stock SIP is a must-have for DIY Investors?
Systematic Investment Plans (SIPs) have been a tried and trusted investment method adopted by retail investors for many years. This mode, especially mutual fund SIPs has enabled many retail investors kick start their journey of investing in equities. While so far, SIP investments are largely done through the mutual fund route, investors, especially Do-It-Yourself (DIY) investors should extend this mode to equity SIPs (ESIPs) as well.
A quick glance at important numbers will shed light on the massive growth of SIPs in recent times.
Data from the Association of Mutual Funds in India (AMFI) suggests that new SIP account registrations increased to a record 2.68 million in September 2021.
On an annualized basis, the SIP book has grown 22.8% over the last five years, taking total assets under management of the funds linked to the SIP accounts to ₹5.44 lakh crore in September 2021.This is equivalent to 14.83% of the total industry AUM.
While ESIPs are relatively smaller, their growth has been rather impressive. Over the last couple of years, there has been a multifold jump in ESIP investments. This is partly an outcome of growing investor awareness about the benefits of regular investing.
News reports suggest that there has been a 35% annual increase in number of investors opting for stock SIPs over the past couple of years. Interestingly, amounts invested per month through ESIPs have grown at a faster pace of 75% over the same time frame.
How does an ESIP work?
Under this method, an investor can choose to invest a fixed amount in shares of one or more companies or buy a fixed number of shares at regular intervals. Much of the benefits provided by a mutual fund are available in an ESIP as well (see table). Investors can select the frequency (daily, weekly or monthly) and amount/number of shares.
For example, Mr. A can buy 10 shares each of Tata Power and SBI on the 5th of every month or every Monday of the week or even daily. He can do so by signing up for a stock SIP with his stock broker.
Brokerages enable such investments by:
a) Sharing ideas/research on good quality stocks.
b) Sending reminder text messages/emails a day before ESIP due date.
c) Not charging any additional costs for the above services.
But, brokerage charges apply when an investor purchases shares.
Mutual Fund SIP versus ESIP
There is not much difference between the two, and both save investors the hassle of timing the market – which more often than not is the domain of investment experts. Such SIPs facilitate disciplined investments and more importantly, help investors build large corpus from relatively smaller sized investments. The table below summarizes key features of mutual fund SIP and ESIPs.
|
Particulars |
Mutual Fund SIP |
Stock SIP |
|
Protection against market volatility/unpredictable stock price movement |
Yes |
Yes |
|
Benefit from rupee cost averaging |
Yes |
Yes |
|
Need to time the market |
No |
No |
|
Investor can select the stocks to invest in |
No |
Yes |
|
Invest small amounts |
Yes |
Yes |
|
Low cost of transaction |
Yes |
Yes |
|
Invest in large-cap, mid-cap and micro-cap stocks |
Not always |
Yes |
|
Lower concentration risk |
Yes |
Not always |
One key difference between mutual fund SIPs and ESIPs is that in ESIPs investors themselves identify the stocks they want to purchase. This usually entails undertaking research, adequate due diligence and deep dive into the company’s business – something that DIY investors do anyways.
They can also rely on research-backed investment advice provided by their brokerage. If the stock picks are right, compounding can work wonders in long term wealth creation. For example, a weekly ESIP of ₹9,000 in Bajaj Finance for the last 5 years would have created wealth of over ₹1 crore today (~50% return p.a.)
Advantages of investing via ESIP
ESIP is gaining popularity among investors due to the following benefits:
a) Low cost compared to mutual funds since there are no management fees
b) You get to choose the stocks you want to invest in
c) Invest in the sector or stock as per your risk appetite and confidence
d) Benefit from the power of compounding of sector leaders
e) Choice of diversified low cost investing like Exchange Traded Funds (ETFs) also available.
Strategies to follow while investing via ESIP
ESIP essentially is a ‘buy and hold’ strategy, and not a ‘buy and forget’ one. Investors have to carefully identify good quality stocks across different sectors and market capitalization. Follow basic rules of equity investing such as:
a) Avoid capital-intensive/high-debt companies
b) Select companies having strong, sustainable economic moat
c) Stay away from complex and/or cyclical businesses
d) Manage your entry and exit by taking advice of experts
e) Monitor and review the stocks regularly
ESIP + ETF
ETFs have now become the largest category in terms of assets under management and rightly so, due to the low-cost, diversified and non-biased nature of investments. Hence ESIP in ETFs is a very potent tool for investors today. With new indices being created and new ETFs being launched, investors can do ESIP in the index of their choice based on their risk appetite and investment horizon. For beginners, they can try with broad based indices like Nifty.
Investors can set up ESIP on 5paisa in 3 quick steps
1) Choose stock
2) Enter quantity and frequency
3) Set up
5paisa is the first discount broker in the country to offer ESIP product. Since launch in September 2021, ESIP has garnered overwhelming response so far with more than 500 fresh SIPs being registered every day on the 5Paisa platform. Till date about 30,000 SIPs have already been registered by about 5,000 investors and the numbers are growing every day.
It is true that ESIPs is a great way to safeguard investors from extreme volatility in markets as well as to create long term wealth. However, investors must still exercise caution to manage the risks effectively.
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