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Why it is better for people to invest via SIPs


The Indian stock market, which is trading near its lifetime high, has outperformed its global peers over certain periods of time. This has attracted many first-time investors who are now looking for quick returns. Traditionally majority of them have been investing in stocks through mutual funds which are part of their systematic investment plan (SIP). It seems that the current market rally has made them so overconfident that they have started investing directly in stocks. One of the possible reasons for this is the influence of the ‘self-styled market guru’.

Worryingly, some people are diverting funds from their SIPs to invest directly in individual stocks at the risk of losing a large part of their capital. Another concern is that they are making such investments without any proper research. This pattern has been aided by the advent of technology and the rise of social media groups that provide ‘tips’ on various stocks. The irony here is that people who are not authorized by the Securities and Exchange Board of India (Sebi), the guardian of investors, give such advice. To offer such advice, one must compulsorily register with Sebi as a registered investment adviser.

Data released by Amfi (see table) shows a 6% decrease in the number of new SIPs registered for the period between April 2022 and March 2023. The number of SIPs discontinued jumped 29% during this period. This implies that funds are being moved out of regular SIPs for direct stock investment. As of April 30, there are 64.2 million SIP accounts that have seen inflows 13,728 crore.

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Investments in the stock market should be made under appropriate professional advice. Major brokerage houses have made it easy for investors to subscribe to SIPs through their mobile apps with such a small amount 500. SIPs are the best way to participate in the markets, and investing in individual stocks is very risky due to market volatility. Investing through SIPs helps in rupee averaging without worrying about market volatility.

Many people tend to stop investing when their SIP returns are negative and withdraw their money. Some are even tempted to stop SIPs and move to direct investment in stocks to cover their losses. This is dangerous. SIP returns tend to turn negative or positive based on market conditions over a period of time. Under such circumstances, investors should behave in a disciplined manner and take professional advice before switching from SIP to direct investments. Investors can also look at increasing the SIP amounts whenever the market is down or their investment capacity goes up with increased earnings.

Ranjith Krishnan is a faculty member and industry liaison officer, National Institute of Securities Markets, and Animesh Srivastava is an advocate in Delhi.

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Updated: 26 June 2023, 12:35 AM IST

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