We present herewith two set of stocks (Better known – Medium risk and Lesser known stocks – High Risk), which investors, based on their risk profile, can look at for investing from a medium term perspective in a systematic investment way (SIP).
While the frontline indices have corrected from recent highs due to global and local macro factors, mid and small caps have done well (though they too have come under pressure lately). While a further correction will not be entirely unexpected, using a SIP or averaging policy may be advisable (for aggressive investors, this may be in addition to an initial lumpsum investment, if they so choose). This will enable lowering the average entry level due to expected fall in prices (in line with the expected fall in these stocks).
SIP investments will give good returns only if the average entry price is lower (due to the initial fall expected). In case the stock price first rises and then falls, SIP investment may not generate attractive returns. One of the criteria for choosing these stocks is that there is a good chance that they could first fall for some weeks/months and then rise so that the full benefit of averaging is available.
Systematic Investment Plans, or SIPs, are expected to curb volatility, both on the upside as well as downside. This is done by cost averaging since the investments are made on a periodic basis, and not in a lump sum. Though the investment amount is fixed, more units are purchased when the market/stock trends down, and fewer units are purchased when the market/stock moves up.
If compared with lump-sum investing, cost averaging does not work to the investor’s benefit in a rising market. While cost averaging cushions your investment during a downside, it also irons out gains made in a bull run to some extent. But to be effective, it needs to be sustained over a long time frame or at least an entire market cycle.
In case, at any time during the period of SIP, the stock price moves up sharply (compared to the average entry price) – to attain the probable upside level or a good return above the average entry price – depending on the period of investment, capitalization and volatility of the individual stocks, then it would be a good idea to stop the SIP and sell the stocks booking the profits accrued.
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