nottheaverageactuary

Actuarial news and views from Cape Town and beyond

EQUITY SYSTEMATIC INVESTMENT PLAN

Leave a comment

Equities have generally given a higher return as compared to other asset classes although, relatively, bearing higher risks. Timing the market is a common activity that equity investors engage in where they attempt to predict the future direction of the market in order to optimise their equity investments returns .Amongst the decisions that needs to be taken when timing the market is in the selection of stock and the right price to enter the market at and thus this means the mistiming of equity investments could lead to large losses by large investors and as such tools are required to hedge this loss risk. One of the tools that can be used to hedge for such risks is through the use of Systematic Investment Plans (SIP).

SIP’s are disciplined and long term instruments in which one builds a portfolio of stocks over a long time horizon through small investment amounts in stocks at regular intervals ,e.g. monthly basis, facilitated by a broker from a mutual fund (the intervals are at the discretion of the investor). There are basically two types of SIP-Amount Based SIP and Quantity Based SIP.

  1. Amount Based SIP: This type of SIP entails a fixed sum of money being invested in some selected equities on a fixed regular basis. The amount is decided upon by the investor and hence has some flexibility in this regard.
  1. Quantity Based SIP: Entails a fixed number of shares being bought in fixed regular intervals from any company of the investor’s choice and hence gives flexibility in the number of shares to buy per set time interval.

The key disadvantage of fixing the number of shares to be bought at regular intervals is that the investor will not benefit from low share prices as they will be confined to the set quantity of shares stipulated. However the disadvantage for the fixed amount SIP is that shares are often only available in whole numbers and as such the full amount will not always be utilised.

Overall however, the main benefits of SIP includes:

  • Reduced average cost per share overtime.
  • Removes the need for market timing which requires active management.
  • Can be started with very small amounts of money.
  • Allows for diversification at minimal costs.

References:

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s