SIP has been one of those few attractive route to equity investment for retail investors and this has made many stock brokers’ to come up with what is called Stock SIP. Let me share my views on it.
Systematic Investment Plan aka SIP has been one of those few attractive route to equity investment for retail investors and this has made many stock brokers’ to come up with what is called Systematic investment plan into stocks or Stock SIP. As far as I remember it was ShareKhan (ShareKhan review) to pioneer this and now we have the same at ICICIDirect (ICICIDirect Review) as well. I am sure slowly every broking house will adapt to this but is it right for the investor or is it only best for the broker’s. Let me share my views on the same.
1. Bad Trade Execution
Stock SIP’s are normally executed as market order and rest assured no pro trader or a savvy investor should ever do that. I never ever execute a market order. It is always a limit order.
2. Buying into the morning spike
SIP Orders are placed on the specified date before the market opens (at least ShareKhan does it that way) which actually means you are buying into the morning spike and paying the price higher than probably you could have purchased yourself.
3. Time averaging and not price averaging
Your next purchase in a stock is not because you have seen a downside in price but mainly because your time to invest has come. Let’s say that you purchased Stock A at 1000 Rs. After a week or even a month you see that the same stock is at Rs 950 or even 1050. Should you purchase more? The rule I follow is – I never average it before a 10% fall or a closing above resistance with strong volume but for equity SIP you average at whatever price you find the share at a given day. Not ideal for investment.
Why Equity SIP is being adopted by brokers?
The answer is brokerage. Mutual fund SIP has been very successful product for small retail investors and after eradication of entry load from mutual funds these brokerage houses are not getting the commission for such a great product and so they have come up with same great looking product (not a great product) “SIP for stock” where they can bag the commission for those small retail investors for whom the term SIP always works.
I have never done any stock SIP and don’t have any plans to be doing so as well. Are you doing stock SIP? If you have done Stock SIP share your experiences and returns in comments below. Shared knowledge can help many other fellow investors compare and judge the new way of investment.
I agree with Sameep.
SIP is best for long term investors.
If you are into short term gains, SIP is not for you because you only want to buy in dips to maximize your gain considering brokerage and income tax with a period of investment in mind.
However as a long term investor you dont want to be peculiar about the pricing of the day. You want to build the portfolio with particular stock.
SIP is one of the best things I have seen in stocks.
To be frank, I was never SIP investor in MF with above reasons Shabbir gave. But as a long term investor for stocks SIP makes sense to me.
For short term games I play in stock, I can never think of using SIP.
Also, with short term investment, one has to know he has to be good in stocks, else it is not for him/her whehter with SIP or otherwise.
I have Sharekhan account. I do the SIP myself with BSE 30-Sensex share (excluding govt owned company with more than 51% like ONGC, CIL ) I do it on last wednesday of the month! (It is good the do if the syocks are going up every month. It is better to do in the middle of the month if the stocks are going down every month) I note down the index of last Thursday of the month.
with regards,
Suresh A S
Suresh, there is no general rule that any particular time of the month stocks are particularly down or up and on top of that SIP is more of a long term prospects and so instead of focusing on buying lower, try focus on performance of your SIP and see if there are other better performing options in the same category of investment.
I feel that, bad trade execution and time averaging and not price averaging are the main reason. Thank you for sharing this nice guide.
I too have my account with shrekhan.. and …i faced the same problems as Shabbir faced.
Hi Shabbir
I am afraid that me too not agreed with you for this equity SIP and agreed with Sameep. I am too using ICICI Direct for my investments and started Equity SIP recently for some shares and for long term.
Hi Khalid, great to see that but until there is some correction you cannot say it is a good strategy.
Hi Shabbir ,
I’m sorry but I’ll have to disagree with you on this one. I think SIP’s in stocks are a great way to build a long term portfolio. The key here being ” long term “. I only started my stock SIP recently , so I really don’t have any returns I can boast about yet. However , before I started my SIP in stocks , I did some number crunching. Again , this will only work in the long term.
I’m going to use ONGC as an example for this comment. If I had started a SIP for ONGC for Rs.10000 in Nov 2005 , today I would have had 575 shares at an average price of Rs.1043. ( only an average from the nse website )
Here is what I feel about the three points you mentioned.
1. Bad Trade Execution
For lump sum investments , it might matter . But for long term investments , i doubt a few rupees / paise higher , really makes a significant difference.
That said , however , if I had bought ONGC at an average of the highest daily price (again , an average from the nse website) @ Rs. 10000 a month , I would now have 565 Shares at an average price of Rs. 1063.
An average of the lowest daily price would give me 586 Shares @ Rs. 1023
2. Buying into the morning spike
Same arguments as above. However , I would like to add two additional points.
With the change in the market regulations recently , morning spike is on its way out. I guess the pre trade window is working well . Atleast for the index stocks.
Secondly , since I have been using ICICI Direct , I know for a fact that their orders are placed around 11 AM. There is also something about not investing on a day when the market seems very volatile or something.
3. Time averaging and not price averaging
You have a valid point , however , again , over the long term , I don’t know how much it would matter. The ideal way would be value cost averaging , but that can get tedious for a retail investor.
I like the option of investing regularly (i.e. every month) in some quality stocks for the long term. These stocks are generally always quoting at a premium and is difficult to get them at a reasonable valuation. Besides , the stocks I’ve selected are also all good dividend paying stocks.
IMHO , I find that equity SIP’s are the best way ‘I’ can build a long term portfolio of generally overvalued companies that I would like to own . So I’ve allocated a percentage of my monthly investment amount to equity SIPs.
Hi Sameep, I guess buying at 11 by ICICIDirect is a wise decision but for ShareKhan I don’t think it is possible. Yes I have ICICI Account but I don’t use them for buying because of high brokerage.
Now about the stock you are talking about is ONGC and 1 year chart of ONGC is very stable as far as price movement. Low of close to 1000 and high of 1450 but majority of the time stock is between 1200 and 1300 for the complete one year and so I don’t think this should be ideal to judge but yes I do really appreciate your sharing because as I theoretically think it may not work but you never know what is the practical outcome. Thanks for sharing.
Like I said , ONGC was just an example. The other stocks I have selected for my SIP are Nestle , NTPC , Hero Honda & Asian Paints.
If it is working that is great and it gives me a reason to experiment.
Also I missed one point here and that is about the pre-market to control morning spike and that is never a possibility. I trade in foreign exchanges as well where we have almost an hour+ of pre market and yet morning spikes are not prevented.
Equity SIP is different from Mutual Fund Sip because in mutual funds your investment is diversified into many sectors and stocks but for equity SIP you are investing in one company.