STOCK ACCUMULATION THROGH SIP

SIP or Systematic Investment Plan is a term used in context of investments in Mutual Funds. Most MFs allow investment through the SIP route, which enables the novice investor to even out his investments over a period of time, by investing in the mutual fund in small chunks at regular intervals. For example, if you want to invest Rs.12000 in a mutual fund scheme you can invest it in 12 monthly instalments of Rs. 1000 each.

SIP can be used effectively to buy your favourite stocks also. It helps the investor to overcome the emotions of greed and fear. Most investors cannot tolerate a loss in their portfolio, and once your favourite stock falls below your purchase price you generally get disturbed. In rising markets we tend to make purchases at higher prices, because we do not want to be left out of acquring our favourite stock. It is impossible to predict either the top or the bottom of the market for a particular stock. SIP can help you overcome this dillema. How to make SIP work?

STEP 1: Identify your favourite stock. Do a thorough EIC analysis: analysis about economic scenario, industry analysis and growth prospects of that sector, company's past performance and future growth projections. Identify the intrinsic price of the company, which gives you adequate 'margin of safety'.
STEP 2: Wait for this price target to be acheived.
STEP3: Start buying your favourite stock in small lots. Add more if the price dips, this will reduce your average price and will help in increasing your 'margin of safety'.

EXAMPLE: Let us assume that you have identified TATA STEEL as your favourite stock, and you analysed Rs. 800 as its intrinsic worth. The stock has closed at Rs. 782. You can start accumulating the stock. If you want to buy 100 shares of this company spread this buying into 4 lots of 25 shares each. Your average price of acquisition will be reduced in a falling market and you will have no regrets of buying at a high price. If the price of the stock rebounds and starts rising but is still below your intrinsic price of Rs. 800, you will still have adequate margin of safety. However, temporary swings in the market should be taken in a stride, provided you have selected the right stock.