An investment option that BEATS market volatility

Equity SIPs are meant for long-term investors and choice of stocks should be made on fundamentals of the company.

In an uncertain market, with small investors reluctant to write fat cheques to buy stocks, broking firms are peddling a new product: Equity SIPs. Equity SIPs act as a hedge against price volatility as it averages the cost of purchase of any chosen stock.

Inspite of current market volatility, it has been proved time and again that equity markets give best returns in long run. If one is worried about the impact of possible volatility of equity markets on your investments, one way of minimising the risk of volatility is investing in equities through Systematic Investment Plans i.e. investing in stocks directly through equity SIPs.

An equity SIP allows you to invest in a set of stocks or exchange traded funds at regular intervals and beat market volatility by averaging out the costs. Many online equity brokerages such as ICICIDirect or HDFC Securities offer equity SIPs of varying amounts , frequencies and tenure.

The latest to introduce this concept is Reliance Securities, which launched the Regular Stock Purchase (RSP) plan last week. Other firms offering similar products include Geojit BNP Paribas Financial Services, Kotak Securities, HDFC Securities, ICICI Securities, Motilal Oswal Financial Services and IIFL.

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Courtesy: Investment-Mantra.in

You can set a SIP, which buys fixed number of shares or invests a fixed amount in equities on regular intervals. The investment amount can be given through cheques or transferred online through automated electronic clearance from your bank account. The shares are bought at prevailing market rate at the time of SIP. Most equity SIP plans offer you to create your own portfolio without any investment limits. There is no cap on either investments or number of equity. With equity SIP, customers can choose to invest at a specified frequency -- daily, weekly, fortnightly or monthly in stock of your choice. The choice of a minimum investment amount is stipulated by each brokerage, varying across players. For instance, Motilal Oswal pegs the amount at Rs 2,000; for IIFL, it is Rs 5,000. There is, typically, no ceiling on the maximum amount that can be invested each month.

Alternatively, investors choosing the quantity-based option can buy a specific number of stocks in each installment. Only the amount of investment you need to make may vary each time, depending on the stock price at that time. So, say you decide to buy five stocks of company X each month. If the price of the stock this month is Rs 1,000, you will spend Rs 5,000. Next month, if the price drops drastically to Rs 500, you will end by investing just Rs 2,500.

The option is high on liquidity, too. Investors can sell their stocks at any point, though it is not advisable, especially if one has purchased the stocks from a long-term perspective. An exit load is also not levied for premature exits, unlike MFs, where an exit within a year is usually penalised. The broking charges typically depend on the deal you have struck with your brokerage. It can vary at 0.05-0.5 per cent, charged per transaction (buying as well as selling). The brokerage is in line with that charged for regular delivery-based trades.

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Why equity SIPs

Investing in equities is all about being able to buy low and sell high. However, most new investors tend to buy when valuations of stock is high and sell when valuations start declining. This results in loss to investor. Equity SIPs allow you to avoid this common mistake in stock trading.

Equity SIP eliminate the market timing -- related guesswork. Though this doesn't guarantee profits, it allows you to participate in the market at all levels in a detached manner. Investors who pay too much attention to the sentiment of markets may not buy when stock is down and may miss the opportunity to buy the stock at that level. SIP makes the investment process clinical and takes the sentiment out, which results in time tested returns.

Equity SIP also reduces the risk of paying high on shares. By buying shares in stages over period of time, it averages out the process and prevents a lumpy investment. It also enables the investor to match his investment with his cash flows.

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Equity SIP offers you the advantage of reduced volatility risk and discipline investment without any additional burden or limitations. Shares bought through SIPs are no different from ones bought in traditional cash segment. Once the shares are in your demat account, you can sell them or mortgage them freely as per requirement. It is important to keep track of your portfolio and not to be passive about your investments. One should always invest based on sound research and be open to exiting stocks which have a negative outlook for the future.

Equity SIP is meant for long-term investor and choice of stocks should be made on fundamentals of the company. If the market doesn't do well for a certain period, investor should not worry but continue investing through equity SIPs if company fundamentals remain intact as it will reduce the average buying price which in long term can prove fruitful.

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Cost factor

Investing in equities through SIPs doesn't require any additional cost other than the regular brokerage charges and cost for maintaining a demat account for holding your shares in electronic format. However there may be cases where some brokerages charge a fixed brokerage per transaction involving small monetary amount.

The concept is similar to mutual fund SIPs. And like in MF SIPs, which were introduced in early 2000, it's been a slow start for equity SIPs too. However, top broking house officials are hopeful it would also go the mutual fund industry's way. As per latest estimates, the total number of SIPs in the fund industry is about 55 lakh, with every fund house currently focusing on growing their SIP numbers.

While the equity SIP option works almost exactly like MFs, there is one major difference. In MFs, you don't have to pick individual stocks. Based on one's risk profile, one can pick the scheme category and take exposure to a multitude of stocks through a limited amount. That is not possible in the case of equity SIPs. Investors need to understand the nuances of the markets and be able to identify high-performing stocks before taking the plunge.

Investors with a regular monthly income can use this route to invest pre-decided part of monthly savings in stocks of their choice or a basket of stocks.

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Our take on equity SIPs

Timing the markets is not something one can achieve with accuracy since equity market is never a stable environment. It is more of a gut feeling. Once can never surely time the market. Markets are driven not just by earnings but also by sentiments

In such a scenario, an equity SIP concept may bring in much needed discipline among small investors to invest regularly in equities and not to invest lump sum in high risk stocks when markets are on a all time high.

With volatility in equity markets at an all time high, starting with equity SIP in a fundamentally sound stock may not be a bad option. Rather than waiting on sidelines in hope of markets sliding down further, start investing systematically and don't defer your investment decisions any further.