SIP: works or not? Caveat about direct equity SIPs!

SIP creates wealth in the long run, however it gives no immediate gratification. Equity trading (what the common man thinks is investing) gives immediate gratification and does not create wealth for the client. The broker wants him to trade so that broker’s wealth goes up.

So what is the solution?

Sell SIP in equities as a fantastic product. The call goes something like this – “Sir in volatile markets you should be investing in small lots instead of lump-sum, so we have an EQUITY SIP …it works like this. Every month you invest Rs. 5k in a scrip that we choose, thus you create a portfolio”

Sounds good, well it is not. Averaging works only in a portfolio – rupee (dollar) cost averaging – which is what SIP helps you do DOES NOT WORK IN CASE OF A SINGLE SCRIP. Imagine if you had bought silverline at Rs. 1300 ….and you are still averaging, you would have been wiped out. In case of a large cap mutual fund, the ups and downs are not so steep, so you can do an SIP.

With a single scrip you can average, but requires tremendous amount of information, and skill. Do not fall for such sales pitches. You will be red in 3 years time!

This actually reminds me of a Ben Graham quote:” The individual investor should consistently act as an investor and not as a speculator”

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3 Responses to “SIP: works or not? Caveat about direct equity SIPs!”

  1. thanks – i could never appreciate that averaging works only in a PORTFOLIO and not in a single scrip. It is an important learning which I hope to use in my future investments. The more I read your blog, the more I am convinced that I should give my money to a fund manager. Is that the general drift in your writing? Are you doing subtle marketing for mfs and ul plans? Sorry to have asked, but just thot there might be others too wanting to hear your answer…phaps!

  2. NO. I do not believe that all of us should give all of our money to fund managers. However, if we do manage our own portfolios, we should be willing to invest in investment education – reading helps. Watching TV does not.

    You should keep track of what you invest – try and check howz ur performance vis a vis a fund manager. If you are outperforming a fund manager, chuck your job and apply for a FM job. If you are underperforming, start an SIP. Simple. Do not argue with numbers – luck, bad luck, ….are all already reflected. If a f m is lucky, I will be happy to luck his ride!

  3. Ravinder Makhaik on May 12th, 2008 at 1:10 pm

    Subramoney, any SIP recommendations that one can take a bet on.

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