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The pros and cons of stock SIPs


December 21, 2021

With more retail investors wanting to get in on the action happening in the stock markets, SIP in stocks have been gaining popularity as it allows investors to buy stocks in reasonable quantities with time, even if they cannot spare a large sum in one go. What is an SIP in stocks, how does it work, how does an SIP in stocks stack up against a lump sum investment? Should you make an SIP in stocks your preferred route to investing in equity?

sip in stocks, how to do sip in stock, sip in stocks, sip in stocks calculator

What is SIP in stocks?

SIPs in mutual funds, have over time, proved their ability to minimize the risk of making ill-timed investments and have helped investors bring discipline and the power of compounding to the process of wealth building. SIP in stocks seeks to extend this approach to investing in equity as well. Known by different names by different brokers, SIP in stocks, makes purchases of stocks of a predetermined amount / quantity at regular intervals (for e.g. daily / fortnightly / monthly). By opting for an SIP in stocks, you will be investing directly in equity and will therefore need a demat and a trading account. Brokerage charges too will apply on the transactions.

Many of the benefits of investing in mutual funds through the SIP route are what draw retail investors to SIP in stocks. 

  • First, SIP in stocks makes stock investing more accessible because it requires a regular but much smaller financial commitment as against a lump sum investment. 
  • Second, because it gets automated and you don’t have to initiate it every time after you do the initial set up, it runs on auto pilot and brings about a discipline to the process with minimal effort. 
  • In addition to the above, investors also believe that SIP in stocks reduces the risks inherent to equity investing, especially the risk associated with volatility, by not needing to time investments. By entering the market at various price points, it is believed that the price is averaged out (rupee cost averaging) much like an SIP in mutual funds. 
  • Compared to the mutual fund route to investing in equity, directly accessing stocks through an SIP in stocks is considered a big plus as it saves on the fund management costs.

How does an SIP in stocks measure up in terms of returns?

If you would like to quickly see how an SIP in stocks fares in terms of returns, compared to a lump sum investment, based on past data, our Stock SIP Calculator  will come in handy. The calculator is powered by Google Finance and therefore, it works only on Google sheets. Below are the instructions to use the stock SIP calculator.

Step 1: Clicking on the link (above), will ask you to sign in to any Google account following which, a pop-up will ask if you would like to make a copy of the calculator to your Google drive. Click on ‘Make a copy’.

Now you should see a page that looks like this.

SIP in Stocks example

Step 2: Select Company
Here you can choose any of the 1700+ companies in the dropdown for which the calculator can perform the calculation. If no company has been selected or an incorrect name has been input, an error message will be displayed.

Step 3: Enter the Start Date
This is the date from which you would have begun the SIP. Do note that the SIP is assumed to happen at the start of the month for all periods. If you enter a date before the 5th of a month, the stock price at the beginning of the same month will be considered. In case you enter a date after the 5th of the month then the stock price at the beginning of the next month will be considered. 

(The historical data availability for different stocks are based on their respective IPO dates and for how long Google Finance has the data. Please refer to cell D4 to check the date from which historical data is available. In case the user inputs a date earlier than this, the tool will show an error.)

Step 4: Enter the End Date
This is the date at which the SIP would have ended. Since this is a calculator to compute past SIP returns, the latest date that can be entered is today. The calculator will not assume any prices to compute future returns.

Step 5: Enter the Monthly SIP amount
This is the maximum amount you would have invested in the selected stocks each month. This and the price of the stock determines the number of shares you would have purchased. For example, if you are considering investing Rs.2,500 in Wipro Ltd. every month (the stock price is around Rs.712) the maximum amount of stocks that can be purchased is 3. The amount of Rs.2,136 (Rs. 712 * 3) only will be considered as investment. The total sum of all investments made can be found in cell C11.

At this point, the calculator might take a few seconds to process as it needs to download historical price information and then compute the returns for the stock. To assess relative performance, we have done the following: 

  • Included the Nifty 50 Index SIP. You can see both the value and XIRR returns for the same period and the same value of investments in the Nifty 50. 
  • Included a simple lump sum comparison against SIP. 

This assumes that the total sum of all SIPs done during the period is invested at the beginning of the period in the stock / Index and allowed to compound till the end of the period. 

Note: Use the Stock SIP Calculator as an information source only. There is no guarantee that a stock that has given impressive returns in the past will continue to do so in the future. Do your due diligence or consult your advisor before making any investment decisions.

The case against an SIP in stocks

So should we simply set a mandate to buy a particular stock or set of stocks every month and forget about it like we do for our mutual fund SIPs? Despite the advantages (convenience and requiring a lower financial commitment) is a SIP in stocks worth it? We think not. Our earlier article, ‘SIPs in stocks: should you go for it?’ gives you four big reasons why a SIP in stocks may not be the best way to accumulate equity in your portfolio. Below are the ways in which we think a SIP in stocks could trip you up.

#1 Odds of choosing  the right stock

A great deal of success in stock investing depends on what stock you choose to invest in. Many brokers try and help improve the odds here by providing research and by recommending candidates for an SIP in stocks. Let’s assume you took a safe bet from one of the well-known Nifty 50 stocks. Here is an SIP performance result comparison with the Nifty 50 index for a 5 year period.

The assumption here is that you would have bought at least 1 stock every month for the entire 5-year period. If you were lucky enough to pick one of the outperformers like Bajaj Auto Ltd. or BPCL, you would have had a handsome 40%+ CAGR return in the 5-year period.

These historical numbers are mouth-watering enough to make you want you to go pick a stock from the Nifty-50 right away. But hold on – the data shows that there is less than a 50% probability that you will end up picking stocks that outperform the market. What’s more, close to 1/5th of the stocks not only underperformed the market but also resulted in capital erosion like the two candidates in the graphs below.

Making an incorrect choice and sticking with the wrong stocks like these might cause considerable dent by eroding a lot of your capital.

SIP in stocks - Suzlon Energy
SIP in stocks - Jaiprakash Associates

#2 Knowing when to enter

Even if you do the right research and analysis and pick a good growth stock, timing your entry and exit is still important to maximise the long term returns in equity investing especially in a portfolio that is not diversified. The entry has to be timed so that the value in the stock is not already factored into the price. Further, market corrections may present opportunities to buy. In order to be able to do this effectively, you will need to put in a considerable amount of time and effort which is negated in an SIP in stocks where equity investing pretty much runs on its own, once you set it up.

#3 Knowing when to call it quits

Equally important, is being clued in to changes in the fundamentals of the stock and knowing when to exit. Let’s take a classic example - Yes Bank Ltd. This was a high growth company until mid-2018. If you had started a stock SIP of Rs 2,500 in Yes Bank on 1-Jan-2010, the SIP report card as of 1-Sep-2018 would have looked like this:

*Total amount invested: Rs 2,52,314

*Market value: Rs 9,70,890

*XIRR: 30.16%

Impressive indeed!

After a month, trouble started for Yes Bank. There were questions about the quality of its loan book and the stock corrected by more than 46% in just one month and the report card of stock SIP started to look like this:

  • Total amount invested: Rs 2,57,106
  • Market value: Rs 4,86,489
  • XIRR: 14.18%
SIP in stocks, Yes Bank vs Nifty 50 Index

Almost half of the value was eroded in just a month. At this point in time, an investor would have had two options:

  1. See if the fundamental rationale to invest in Yes Bank still holds true, if not, exit the stock
  2. Ignore market movement and continue the SIP

We have all been told what not to do in corrections. Do not stop SIPs and do not redeem investments. This may hold for a widely diversified basket of stocks like that of a mutual fund but not for a single or small portfolio of stocks. With an automated SIP in stocks, it is easy to lose track of rapid changes in the fundamentals of the company that could cost you dearly. Take a look at what would have happened if you had continued with the SIP in Yes Bank till today (1-Dec-2021). 

  • Total amount invested: Rs 3,50,667
  • Market value: Rs 82,720
  • XIRR: -29.06%

Nothing short of a bloodbath. The stock corrected another 94% after 1-Oct-2018

(An SIP for the same amount and duration in Nifty 50 would have been worth Rs 7,73,939 at an XIRR of 12.63%)

Had corrective action not been taken, more good money would have been thrown into accumulating a stock that one should distance oneself from.  The financial hit from such a move would have been exacerbated by the concentration risk that one would be taking on by virtue of the portfolio not being as diversified as it would be in a mutual fund.

SIP in stocks - key learnings

  • All the common wisdom about SIP investments is for a fairly diversified investment vehicle like mutual funds. The less diversified an investment is, the more important timing and exit strategy becomes.
  • SIP helps us to not get swayed by herd mentality during negative market sentiments. However, a stock falls because of reasons other than broad market sentiments. A fundamental change with a company will reflect in the stock price. This cannot be ignored and one cannot soldier on with an SIP in a stock where the case for investment no longer holds true.
  • Stock investments are not meant for setting up on autopilot or to buy and forget. Whenever anything fundamental about the company changes, the investment thesis needs to be reevaluated to see if it is still a buy, hold or sell.
  • The cost of holding on to a bad stock is much higher than the cost of holding on to a bad (diversified) mutual fund.
  • Diversification and vigilance too are key to success in stock investing and the fund management fees in mutual funds are compensation for this.

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While due care has been taken to ensure that the disclosures, information, and opinions given are fair and reasonable, PrimeInvestor Financial Research Pvt Ltd and/or none of its officers, directors, partners, employees, agents, subsidiaries, affiliates or business associates shall be liable for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including lost profits arising in any way whatsoever from the information/ opinions/ views contained in the research report and recommendations that form part of the Research Service, and/or mails, social media or notifications issued by PrimeInvestor Financial Research Pvt Ltd or any other agency appointed/authorised by PrimeInvestor Financial Research Pvt Ltd. Returns and performance figures mentioned in the research report represent past performance and should not be constituted to be future returns or guaranteed returns.

Any agreements, transactions or other arrangements made between the client and any third party named on (or linked to from) the Website are at your own responsibility and entered into at your own risk. Any information that you receive via the Website, whether or not it is classified as “real time”, may have stopped being current by the time it reaches you. Market price information may be rounded up/down and therefore may not be entirely accurate.

The purpose of these disclosures is to provide essential information about the Research Services in a manner to assist and enable the prospective client/client in making an informed decision for engaging in Research Services before onboarding.

History, present business and background: PrimeInvestor Financial Research Private Limited is registered with SEBI as Research Analyst with registration no. INH200008653. The Research Analyst got its registration on August 19, 2021 and is engaged in offering research and recommendation services.

Disciplinary history: There are no pending material litigations or legal proceedings against the Research Analyst. As on date, no penalties / directions have been issued by SEBI under the SEBI Act or Regulations made thereunder against the Research Analyst relating to Research Analyst services.

Details of the RA's associates: No associates.

Usage of Website Content: This Website is controlled and operated by the RA. All material, including research reports, recommendations, portfolios, ratings, lists of financial products, illustrations, statements, opinions, views, photographs, products, images, artwork, designs, text, graphics, logos, button icons, images, audio and video clips and software (collectively, “Content”) are protected by copyrights, trademarks and other intellectual property rights that are owned and controlled by the RA or by other parties that have licensed their material to us.

Except where otherwise agreed in writing with the RA, material on the Website is solely for the client’s personal, non-commercial use. Except as provided below, the client must not copy, reproduce, republish, upload, post, transmit or distribute such material in any way, including by e-mail or other electronic means and whether directly or indirectly and the client must not assist any other person to do so.

Without the prior written consent of the RA, modification of the materials, use of the materials on any other web site or networked computer environment or use of the materials for any purpose other than personal, non-commercial use is a violation of the copyrights, trademarks and other proprietary rights, and is prohibited. Any use for which the client receives any remuneration, whether in money or otherwise, is a commercial use for the purposes of these Terms.

The client may occasionally distribute a copy of a research report, or a portion of the same, from the Website in non-electronic form to a few individuals without charge, provided the client includes all copyright and other proprietary rights notices in the same form in which the notices appear, original source attribution, and the phrase “Used with permission from PrimeInvestor Financial Research Pvt. Ltd.”

While the client may occasionally download and store research reports or information from the Website for his/her personal use, he/she may not otherwise provide others with access to the same. The foregoing does not apply to any sharing functionality we provide through the Website that expressly allows the client to share Content or links to Content with others. In addition, the client may not use Content he/she has downloaded for personal use to develop or operate an automated trading system or for data or text mining.

The client agrees not to rearrange or modify the Content available through the Website. The client agrees not to display, post, frame, or scrape the Content for use on another website, app, blog, product or service, except as otherwise expressly permitted by these Terms. You agree not to create any derivative work based on or containing the research products and Content. The framing or scraping of or in-line linking to the Services or any Content contained thereon and/or the use of webcrawler, spidering or other automated means to access, copy, index, process and/or store any Content made available on or through the Services other than as expressly authorized by us is prohibited.

The client further agrees to abide by exclusionary protocols (e.g., Robots.txt, Automated Content Access Protocol (ACAP), etc.) that may be used in connection with the Research Services. The client may not access parts of the Research Services to which he/she is not authorized, or attempt to circumvent any restrictions imposed on your use or access of the Services.

As a general rule, the client may not use the Content, including without limitation, any Content made available through one of our RSS Feeds, in any commercial product or service, without our express written consent.

The client may not create apps, extensions, or other products and services that use our Content without our permission. The client may not aggregate or otherwise use our Content in a manner that could reasonably serve as a substitute for a subscription to the Website.

The client may not access or view the Services with the use of any scripts, extensions, or programs that alter the way the Services are displayed, rendered, or transmitted to you without our written consent.

The client agrees not to use the Services for any unlawful purpose. We reserve the right to terminate or restrict the client's access to the Website if, in our opinion, the client's use of the Services may violate any laws, regulations or rulings, infringe upon another person's rights or violate these Terms.

Prohibited content: The Website includes comments sections, blogs and other interactive features that allow interaction among clients and between clients and the RA. We call the information posted by or contributed by users “Contributed Content.” In the course of availing of the Research Services or uploading any post or comment on the Website, the client shall not post any Contributed Content that (i) contains nude, semi-nude, sexually suggestive photos, (ii) tends or is likely to abuse, harass, threaten, impersonate or intimidate other users of the Website and/or Research Services, (iii) is lascivious or appeals to the prurient interest or if its effect is such as to tend to deprave and corrupt persons who are likely to use or have access to the Website and/or Services, or (iv) otherwise violates, is prohibited or restricted by applicable law, rule or regulation, is offensive or illegal or violates the rights of, harms or threatens the safety of other users of the Website and/or Services (collectively “Prohibited Content”).

We reserve the right to cease to provide the client with the Research Services or access to the Website, or terminate your subscription, with immediate effect and without notice and liability, for violating these Terms, applicable law, rules or regulations and reserves the right to remove Prohibited Content which is in violation of these Terms, or is otherwise abusive, illegal or disruptive. The determination of whether any content constitutes Prohibited Content, violates these Terms, or is otherwise abusive illegal or disruptive, is subject to the sole determination of the Firm.

Changes to Research Services: We are constantly endeavouring to improve the quality of Research Services provided to our clients. Due to this, the form and nature of the Research Services provided may change from time to time without any prior notice to the client. We reserve the right to introduce and initiate new features, functionalities, components to the Website and/or Research Services and/or change, alter, modify, or discontinue existing ones without any prior notice to the client.

Warranty and liability disclaimer: The Website, Research Services, and all the materials and services, included on or otherwise made available to the client through this Website is provided by the RA on an “as is” and “as available” basis without any representation or warranties, express or implied except otherwise specified in writing. Without prejudice to the foregoing paragraph, the RA does not warrant that:

  • This Website and/or Research Services will be constantly available, or available at all;
  • The information on this Website or provided through the Research Services is complete, true, accurate or not misleading; or
  • The quality of any products, services, information, or other material that you obtain through the Website or Services will meet your expectations.

The RA, to the fullest extent permitted by law, disclaims all warranties, whether express or implied, including the warranty of merchantability, fitness for particular purpose and non-infringement. The RA makes no warranties about the accuracy, reliability, completeness, or timeliness of the Website, Research Services, Content, Contributed Content, Services, software, text, graphics and links.

The RA does not warrant that this Website, Research Services, information, content, materials, or any other material included on or otherwise made available to you through this Website, their servers, or electronic communication sent by the RA are free of viruses or other harmful components.

Nothing on this Website constitutes, or is meant to constitute, advice of any kind.

Indemnification: The client:

  1. Represents, warrants and covenants that no materials of any kind provided by him/her will:
    1. Violate, plagiarise, or infringe upon the rights of any third party, including copyright, trademark, privacy or other personal or proprietary rights; or
    2. Contain libellous, Prohibited Content or other unlawful material;
  2. Hereby agree to indemnify, defend and hold harmless the RA and all of the RA’s officers, directors, owners, agents, customers/clients, information providers, affiliates, licensors and licensees (collectively, the “Indemnified Parties”) from and against any and all liability and costs, including, without limitation, reasonable advocate’s fees, incurred by the Indemnified Parties in connection with any claim arising out of any breach by the client of these Terms or the foregoing representations, warranties and covenants. The client shall cooperate as fully as reasonably required in the defence of any such claim. The RA reserves the right, at its own expense, to assume the exclusive defence and control of any matter subject to indemnification by the client.

Applicable law: This Website, including the Content and Contributed Content and information contained herein, and the provision of Research Services shall be governed by the Securities and Exchange Board of India, laws of the Republic of India and the courts of Chennai, India which shall retain exclusive jurisdiction to entertain any proceedings in relation to any disputes arising out of the same. As such, the laws of India shall govern any transaction completed using this Website.

Information gathered and tracked: Information submitted or collected on the Website or pursuant to the use of the Services is stored in a database. Specifically, we store the username, name, e-mail address, contact number, as submitted or collected on our Website or through the provision of the Research Services. We may use such information to send out occasional promotional materials, including alerts on new Services available, or other promotional and marketing material relating to our clients and customers.

In accordance with the Information Technology Act 2000, the name and the details of the Grievance Officer at PrimeInvestor is provided below:

Mr. Srikanth Meenakshi
PrimeInvestor Financial Research Pvt. Ltd., Registered office: 659, 4th Avenue, D-Sector, Anna Nagar Western Extension, Chennai 600 101.
Email: [email protected]

11. Mandatory notice:

Clients shall be requested to go through Do’s and Don’ts while dealing with RA as specified in SEBI master circular no. SEBI/HO/MIRSD-POD-1/P/CIR/2024/49 dated May 21, 2024 or as may be specified by SEBI from time to time.

12. Optional Centralised Fee Collection Mechanism:

SEBI has operationalized a centralized fee collection mechanism for IA and RA. Under this mechanism, clients shall pay fees to IAs/RAs through a designated platform/portal administered by a recognized Administration and Supervision body. This is an optional mechanism for the registered entities. At this time, PrimeInvestor has opted out of this fee collection mechanism. Therefore, all subscription payments for the Research Services will be through the modes as specified in Clause 5 of these Terms.

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