An SIP in stock is different than one in mutual funds

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NEW DELHI: A systematic investment plan (SIP) in mutual funds is among the best of investment strategies. Investors put in a small amount every month irrespective of market conditions and over the long run, the purchase cost averages out as funds allocate more units when markets are down and vice versa.

Many stockbrokers offer “SIP” or “auto-invest” facility in individual or a basket of stocks, taking a cue from mutual funds. HDFC Securities, Zerodha, Kotak Securities, among others, offer this option. Like in the case of mutual funds, the broker deducts the client’s account and purchases the selected shares.

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Can retail investors use the same strategy to invest in stocks?

Many investment advisors are of the view that stock SIPs are risky. Stock investment is entirely different from a mutual fund investment. In mutual funds, qualified experts manage the money. Fund managers and their teams keep evaluating new investment opportunities. They buy and sell based on extensive research.

Direct stock investing requires in-depth research, and investors need to pick the stock at a comfortable valuation. There are also company-specific risks. Investors should know when to exit a stock investment. There are many more parameters that an investor must look at and actively track.

If you have SIPs for stocks, too much exposure to a few companies can lead to concentration risk in the direct stock portfolio.

There is a view that you won’t go wrong as long as you are picking “quality” stocks. Just pick companies that are delivering solid earnings growth with good governance and high shareholder return ratios, and you’ll be assured of long-term wealth creation.

But this oversimplifies the process of stock selection. What one investor considers as a quality business, another may not. Therefore, avoid stock SIP if you are a first-time stock investor.

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