The Indian stock market, which is trading close to its lifetime high, has outperformed its global peers over certain time periods. This has attracted many first-time investors who are now looking for quick returns. A majority of them have traditionally been investing in stocks through mutual funds that are a part of their systematic investment plan (SIP). The current market rally seems to have made them so overconfident that they have begun to invest directly in stocks. One of the possible reasons for this could be the influence of ‘self-styled market gurus’.
It is a matter of concern that some people are diverting funds from their SIPs to invest directly in individual stocks at the risk of losing a major 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 mushrooming of social media groups that offer ‘tips’ on various stocks. The irony here is that such advice is proferred by people who are not authorized by The Securities and Exchange Board of India (Sebi), a custodian of investors. To offer such advice, one has to compulsorily register with Sebi as a registered investment adviser.
Data released by Amfi (see table) shows a decline of 6% in the number of new SIPs registered for the period between April 2022 and Mar 2023. The number of SIPs that were discontinued registered a 29% jump during this period. This implies that funds are being moved out of regular SIPs to direct stock investing. As on 30 April, there are 64.2 million SIP accounts that have seen an inflow of ₹13,728 crore.
Investments in the stock market should be done under proper professional advice. Big brokerage houses have made it easy for investors to subscribe to SIPs through their mobile apps with amount as small as ₹500. SIPs are the best way to participate in the markets, while investment in individual stocks is highly risky because of market volatility. Investment via SIPs helps in rupee cost averaging without worrying about market volatility.
Many people tend to stop investing whenever their SIP returns turn 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 have a tendency to turn either 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 making a shift from SIP to direct investments. Investors can also look at increasing the SIP amounts whenever the market is down or when their investing capacity goes up with increased earnings.
Ranjith Krishnan is faculty member and industry liaison officer, National Institute of Securities Markets, and Animesh Srivastava is an advocate in Delhi.
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Updated: 25 Jun 2023, 09:42 PM IST