When an investor opts for a systematic investment plan (SIP) in mutual funds, the purpose is to average the cost of buying a bouquet of stocks, inculcate discipline and not having to worry about daily market fluctuations. Also, the investor probably wants to avoid the headache of analysing individual stocks.
Can an investor who wants to invest in stocks directly adopt this principle?
Experts say it's the right approach but that the investor should understand the nuances of investing in stocks. An investor, after he\she has started an SIP in mutual funds and diversified his portfolio, can invest directly.
"This should form not more than 20-25 per cent of his equity exposure. The balance should be through diversified equity funds," says Lovaii Navlakhi, a Bangalore-based financial planner and managing director of International Money Matters.
Like Navlakhi, brokerage house ICICI Securities says there is a demand for such an investment strategy. The firm has, therefore, launched a service that allows people to invest in stocks and exchange-traded funds (ETFs) directly.
Using this service, a person can invest in gold ETFs at regular intervals daily, weekly, fortnightly and monthly.
"We have seen that investors lose out in timing the market, though it's impossible. When the markets are low, they either wait for a correction or a rise. When the markets start rising, they wait for another dip or invest at the peak. Using this service, one can eliminate emotions coming into the way of investment," says Vishal Gulechha, head of online broking, ICICI Securities.
A person can either choose a specified amount or ask his brokerage to buy a fixed quantity of stocks or ETFs at regular intervals.
"Although its up to the client to decide between the two options, we recommend investing a fixed amount, as an investor cannot average costs if he\she opts for quantity-based purchases," says Gulechha.
Mukesh Dedhia, a certified financial planner, says this is a good product for investors who do not believe in investing through mutual funds. This will give them the comfort of cost averaging like mutual funds. Also, they will be able to control the stock selection.
However, if you are adopting this strategy for directly buying stocks, it should be for the long term (five year-plus), says Brijesh Dalmia, a certified financial planner. He advises that one should start with a minimum of four stocks and stick to S&P CNX Nifty companies.
To use the service, a client needs to have an account with ICICI Securities. He can also do it online through his ICICIDirect trading account. At present, the maximum tenure is 24 months.
The minimum investment is Rs 750. However, if you miss an investment, ICICI Securities does not levy any charge. You can sell the stocks whenever you wish, after the delivery.
Considering it is a long-term investment, an investor should primarily look at largecap stocks, says the brokerage house.
The investment is automated and the purchase is made at 11 am, two hours after trading starts. The logic is that the market usually stabilises by this time. The brokerage charged equals the fee for delivery-based trades.