A lot of people write in to us with consistent regularity asking about whether one should invest in a particular stock via SIP, just like in mutual funds. While there is no harm in going the SIP way, there is no guarantee as to how the compnay will behave a few years on. Here is a recent question and we have tried to answer the query point by point.
In your last issue you talked about Opto Circuits and how it retains all the attractiveness despite a steep fall in its price in the last few months. But, because currently the company's price is down I am a little wary whether my investment would be safe or not. I want to invest in the company through SIPs. But what methodology one should apply? Should I buy X number of shares after every few days or months or is there another way of doing it? Also, is there a time horizon for holding stocks?
-Nimesh Patel
The question the reader has asked covers a lot of points and requires step by step explanation:
a) If anyone would have bought Opto Circuits on August 11 at a price of Rs 277, the effective cost would have been Rs 214 because the company came with bonus issue of 3 shares of every 10 shares held. Hence, for a correct comparison of a share price one should check for three adjustments in stock price which are bonus issue, stock split and right issue.
b) We at Value Research are fundamental analysts and can never give a precise time horizon for investments in equity. Our recommendations are based on either value or growth. Value stocks are those which are currently trading below their fair value. If you feel such a company is now trading at mad valuations or has lost track from where we derived its investment argument, don't think twice about coming out of it whatever the duration of the holding is. Secondly, in growth stocks, if the business of the company is growing year by year we don't mind holding it for one's retirement. As analysts we cannot guess the price at which a company will trade after 3 years but yes, we are pretty sure it will be performing much better in such a long period or anything more than that.
c) Yes, SIP in stocks is a sensible way of investments in equity in long run, especially when the market is volatile both ways. The stocks which we recommend may be fundamentally very good but as it happens many a times we enter at a wrong time, catching a peak or high. For fundamentally-strong companies with growth drivers it is not a big concern in the long-term but it pushes up the time horizon for investment by few years. Two examples of such stocks are Opto Circuits and BHEL. The SIP you can opt for should be value-based and not volume-based. For example, rather than going for a particular number of shares, go for a certain amount every month, say Rs 10,000 every month. The chart shows the investment in Opto Circuits as lump sum bought in August 2011-end and the investment value as in form of SIP, investing Rs 10,000 every month-end. The value as of now, not surprisingly, is higher in case of SIP which Rs 1,20,726 than the lump sum investment value which is Rs 95,892. Finally, don’t do SIP for lifetime rather keep a time frame of one market cycle.
This article was originally published on November 12, 2012.
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