ONE of the best ways to invest is through the systematic investment plan (SIP) route. This ensures regular investment of a fixed sum into a particular asset class, especially equity.
This route is used extensively when it comes to mutual funds, so that there is a regular contribution leading to the build up of a portfolio for the investor. The concept is now being extended to the area of investment in direct equity.
Here is how this will take place: Stock purchase: The principle of the purchase of equities on a regular basis can ensure specific benefits to an investor. This is possible as systematic investments average out the cost of purchase in times good and bad.
This works very well when it comes to the investment in equity-oriented mutual funds and it is relevant for the purpose of purchase of direct equities too. But there are several areas that need attention.
Availability of service: The first thing that has to be understood is that there is a specific place where such a systematic purchase of direct equity can take place. Obviouly, this can be done only when your broker offers such a service.
Now there are several broking outfits that have started offering a facility whereby an individual can ensure that a regular amount goes into the to purchase specific stocks each month. While undertaking this effort, one has to pay attention to some key areas.
Amount invested: The amount that is used for the purchase of shares in the SIP has to be constant every month, because only then will the individual be able to get the benefit of averaging that they desire.
Some options allow the individuals to buy a fixed number of shares each month. In this, there is no advantage of averaging as there is a change in the price of the shares.
In fact this can create problems because in case the price has risen, the available amount set aside will be inadequate and when the prices fall, a part of the amount will remain unutilised.
This factor is adjusted directly when a fixed amount is invested every month and the number of shares get adjusted accordingly, which is what is desired.
The other thing that has to be done is to ensure that the amount invested each month is sufficient enough to buy a few shares so that there is also some diversification available.
For example investing Rs 5,000 a month and then choosing blue chips like Infosys and L&T will mean buying of hardly one share of each of these companies.
Choices: The choice of the selection of shares is also in the hands of the investor and s/he needs to ensure that this is donw in a proper manner.
For someone looking to build a strong portfolio, this will require the inclusion of several bluechips along with a few mid-caps, that have good potential. This is required to ensure that the benefit of the investment is similar to what is achieved in buying a good mutual fund.
While the exact impact of a mutual fund holding cannot be replicated easily, there is a good chance that similar benefits will be available in terms of the construction of portfolio.
Movement: The investor also has to be alert about the nature of the movement that will be seen in the value of the investment compared with the overall portfolio.
If the holdings are not much in number, then there will be a higher volatility in the portfolio.
Outperformance by the holdings is possible only in case of a bull run, where the shares in the portfolio have participated in the run. Chances of a disappointment are high if the shares do not do well and this can also cause a lot of disillusionment.
