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Why systematic investments in top equities make sense

August 04, 2014 13:25 IST

MFYou want to invest in equities but are unsure about which stocks to invest in and how many to buy.

Even if you identify the stocks, how do you know if the price is right?

After all, it saw a sharp rise in the past six months. What if the price falls immediately after you buy?

You can invest through mutual funds but you dislike the idea of paying fund management charges.

Over a long period, this can add to a tidy sum.

One way of addressing these questions is to invest in direct equities in a systematic manner, similar to the Systematic Investment Plans in MFs.

Many brokerages offer plans whereby investors can invest systematically in specified stocks and exchange traded funds.

Investors can opt for a fixed amount or a fixed quantity to be invested on a regular basis, say, every month or every quarter.

If not, you can fix a certain amount and invest that on a regular basis, depending on your cash flow and asset allocation plan.

Let’s list the advantages of doing this:

Rupee cost-averaging

The principle behind systematic investment in equities is the same behind an SIP in MFs.

The biggest benefit is rupee cost-averaging, since you buy more stocks when the price is lower and fewer when the price is high.

“As the cost of your equity purchase is averaged over several transactions, the customer is protected from the stress of timing the market and speculation.

Investors should choose to invest a fixed amount, instead of a fixed quantity.

A fixed amount will buy more units when the market is tending lower and less when the markets are high,” said Vishal Gulechha, head, equity product group, ICICI Securities.

Risk diversification

The other big advantage is risk diversification, since you can invest in stocks across sectors.

There is always a high level of risk when you choose a single stock.

“Diversifying across sectors is very important. Ensure you choose blue chip stocks across seven to eight sectors and choose a basket of 10-15 stocks,” says U R Bhat, director of Dalton Capital.

Today, it is possible to buy as little as one stock, since you can buy online.

So, you can buy in small amounts and build your portfolio.

No hidden charges

Whether you buy through a brokerage's platform or on your own, it is a more transparent method as compared to buying an MF, says B Gopkumar, executive vice-president & head of broking, Kotak Securities.

It’s not like there are no charges while investing directly in equities at all. Every buy/sell transaction in shares involves costs, such as brokerage, securities transaction tax, service tax, demat charges and so on, points out Anil Rego, chief executive officer, Right Horizon.

The difference is that you know exactly what you are paying for.

In an MF, you pay agents’ commission, fund management charges and exit load if applicable.

Many a time, the investor is not aware of how much each charge is, since these are all clubbed under expense ratio.

Over a long time, this can eat into your profits.

Bhat says, “The 2-2.5 per cent fund management charge over a long period can be huge.”

In doing all this, there

are things to keep in mind. We list some:

Stick to large-cap or segment leaders

It is advisable to restrict yourself to the top 10 or 20 frontline stocks -- the market leaders or segment leaders.

Or, you can choose those representative of the indices, such as the Sensex or Nifty.

One should look for companies that are large, have a track record and a brand. “These are companies that have survived 30-40 years and have gone through several business cycles. It is safe to choose companies doing better than others in their respective sectors,” says Jayant Manglik, president-retail distribution, Religare Securities.

One should also look for stocks where future growth visibility is better.

The quality of corporate governance is another factor to be seriously considered, says Gulecha of ICICI Securities.

Hold for long term

While investing systematically, one should hold for a minimum of 18-24 months, going on to as long as possible, says Manglik.

“The systematic investment method is specially recommended for those who can hold for more than 10 years,” he says.

While it is possible to set a price target even in systematic investment, a minimum of three to four years is recommended, says Gopkumar of Kotak Securities.

“We have seen clients who have been buying one particular stock for the past five years, as they believe the company is fundamentally strong.”

When to sell

In the absence of a particular price target or any other information, one way to get out of a particular stock could be when it moves out of the index, says Bhat of Dalton Capital.

“The composition of the index is determined by the company’s market capitalisation, sector leadership and in some cases the considered opinion of a committee of experts.

When a stock moves out of the index and another stock takes its place, it could be an indication for investors to also sell the first stock and start buying the second one,” he explains.

The index usually consists of sector leaders.

If the composition of the index changes, it generally means the sector leader is being challenged by another company which then becomes the sector leader and becomes part of the index.

Disciplined approach

Systematic investment is about discipline, while lumpsum investment is more about timing the market.

So, investors must ensure the amount they fix is available for them to invest every month or every quarter.

“I would recommend it for someone who is used to SIP in MFs and has some idea of equities,” says Gopkumar.

Therefore, investing in stocks is more complex, as you have to keep track of whether you have to pay short-term tax if you sell before one year, says Rego.

“We have seen that such Do It Yourself schemes are more seasonal.

Now that the markets are doing well, clients are interested. But in systematic investment, one should not expect large changes in price or a huge profit in a short time,” says Manglik.

Investors who’re investing on their own should take the time and effort to read on companies and understand their financials before investing, says Bhat.

“Do not get influenced by trends. Read newspapers, research reports, policy changes and so on, since there is no fund manager doing this for you,” he advises.

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Priya Nair
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