There are many mutual fund advisors who will wax eloquent about the benefits of running a systematic investment plan (SIP) on equity mutual funds. You know that an SIP on equity funds enables you to expose yourself gradually to equity over a longer period of time. Additionally, this systematic and organized approach gives you the supplementary benefit of rupee cost averaging (RCA). What RCA does is that the fixed allocation forces you to buy more units when prices are lower. This works in your favour in the long run by reducing your average cost of holding…

What is the rationale for SIPs on equities directly instead of mutual funds?

The question is if investors can do an SIP on equity funds why can’t they do an SIP on direct equities too. Instead of buying a mutual fund scheme regularly, you can identify a set of stocks and invest money into it on a regular basis. The advantage of rupee cost averaging will work here also. However, let us not forget that direct equities are slightly more complicated than buying mutual funds. When you buy mutual funds, you have an expert fund manager assisted by a team of analysts who do the job of stock selection and monitoring for you. When you do an SIP on equities, there is a huge effort called for from you side. So how can one go about successfully doing Equity SIP?

Is there a model by which I can make equity SIPs work successfully in my case?

Running Equity SIP requires a more organized and calibrated approach. Here are 7 points that can help you successfully execute the same…

a) Freeze on your selection of stocks in consultation with your equity advisor and maintain a discipline. Do not digress from that list of stocks and add or deduct stocks from your SIP portfolio at random without consulting your equity advisor

b) Monitoring is the key to running Equity SIP. As an individual you have your limitations. Use your broker’s online portal to set up a variety of financial and non-financial alerts on your holdings so that you are updated on the key metrics pertaining to your SIP stocks

c) When put together, your portfolio of stocks must be as diversified as possible. Avoid too much concentration to specific sectors or even to mid-caps. This adds to your risk and defeats the purpose of an SIP

d) When the stock you are holding dips sharply, use the opportunity to accumulate more. That is when you get the fullest advantage of Equity SIP. Of course, you need to be convinced about the fundamental reason for buying more of the stock

e) Allocate a certain corpus on a weekly basis. In the world of equities, a lot happens in the span of a month. Instead of allocation Rs.30,000/month to equity SIP, look to allocate Rs.7500/week. This will help you best capture the volatility in the stock

f) Evaluate your SIP portfolio against a benchmark like the Nifty or Sensex. You are not a fund manager but you need to ensure that your SIP is at least doing better than the market. If your SIP is consistently underperforming, it may be time for a strategy re-think

g) Ensure that your Equity SIP is in consonance with your overall financial goals. When you make your financial plan, you decide on your equity allocation. Irrespective of your equity fund performance, respect this allocation in your financial plan.

When doing Equity SIPs are there specific things to watch out for and if so what are they?

There are a few basic things you need to be aware of when executing Equity SIP. Firstly, it requires a lot of time and energy to be devoted to the task. If you do not have the time and patience, better leave it to a mutual fund manager. You need to take allocation decisions, execute the trades and also monitor these positions. Secondly, don’t be in a hurry to keep changing your universe of stocks. Create your universe of stocks after a thorough research. The more you tend to flip-flop on the stock list, the more you are likely to lose out on opportunities. Thirdly, there are some critical questions that you need to ask yourself pertaining to risk. Are you overexposed to any particular sector? Are you adding risk instead of reducing risk? Is your SIP portfolio shock proof in the event of major global changes etc? Fourthly, you need to ensure that your SIP portfolio is tax efficient. If you churn your SIP too often, then you not only incur higher transaction costs but also end up paying STCG. That is best avoided. Lastly, conduct a reality check once in a while! If after all these efforts your returns are at par with what you would have earned on a mutual fund SIP, you need to re-think. It is surely not worth the effort and you are better off sticking to MF SIP.