Stock SIPs: will you get rich or lose money? Know this before investing
Investing every month in stocks like a mutual fund SIP can build wealth, but without a fund manager's safety net, picking the wrong company can mean heavy losses.
The Systematic Investment Plan, or SIP, has become hugely popular with mutual fund investors. As returns improve and investors grow more market savvy, many start wondering if the same method can be used to invest directly in company shares.
The answer is yes, but the rules and risks of a stock SIP are completely different from a mutual fund SIP. Anyone looking to profit by putting in money every month in the stock market needs to understand both the strengths and the dangers of this approach.
The biggest advantage of investing a fixed amount every month is that it takes emotion out of the decision. Regardless of whether the market rises or falls, regular investing helps maintain a good average purchase price for the shares. This is especially convenient for salaried people, since they do not need to arrange a large lump sum or wait for the right time to enter the market.
When someone does a mutual fund SIP, the money is spread across several companies and managed by an experienced professional fund manager. If a company performs poorly, the fund manager removes it from the portfolio and picks another good company instead. But there is no such safety cover when investing directly in stocks. If someone keeps putting money every month into a weak company, they could face heavy losses.
A stock SIP proves profitable only when the chosen company has a strong business. Investors should pick companies with a good track record, low debt, healthy cash flow and trustworthy management. Simply investing on schedule is not enough; keeping a close and continuous watch on the company's performance is just as important.
One drawback of having money automatically deducted from the account every month is that investors can become complacent. They start ignoring a company's declining performance or changes in its business. To succeed in the stock market, it is necessary to review one's portfolio from time to time. Investors should keep asking themselves whether the reason they invested in a company still holds true today.
Putting all the money into just one or two favourite stocks can prove to be a big mistake. No matter how good a company is, it too can go through a prolonged bad phase. Investments should therefore be spread across strong companies in different sectors, so that the loss from any one company's decline or collapse is reduced.
For those who know how to identify good companies and have the time to track the market, doing a SIP directly in stocks can be a good approach. It teaches discipline and avoids the hassle of waiting for the right timing. But it is no guarantee of success. In the end, profit or loss will depend on how strong the foundations of the chosen companies are.
