Investing in equities SIP by SIP

Chaiwallah of Dalal Street 

answers 5 questions about SIPs

Whenever a financial planner or a stock broker talks to an investor about putting in some money in the stock market, they generally end up saying "Sir, aap SIP kyun nahi kar lete?"

There is quite a lot of confusion about what this SIP is - is it beneficial and if I put my hard earned money in this, how should I go about it?

So here are 5 questions you wanted to ask about SIPs but didn't know who to ask?

What is SIP?

SIP is short for Systematic Investment Plan. To simplify it, you can consider it to be the opposite of an EMI; With an EMI you pay a certain amount of money every month to clear your loan, while with an SIP you pay a certain amount of money to buy some mutual fund units.

What is mutual fund then?

Remember as a kid when we used to play galli cricket, we'd all chip in some rupees and buy a few balls so that we could all play and not worry if 1-2 balls got lost.

Keep this in mind and tweak the idea slightly. 

Now, we all give some of our money to the  fund manager, who then buys the shares of the companies that he thinks will give the best return to us. So by paying smaller amounts, we have access to a large number of shares (just like by paying a few rupees we had access to a larger supply of balls).

So we can invest in SIPs to invest in Mutual Funds?

In a way yes, but that's not the correct way to say it. SIPs are a vehicle to invest in Mutual Funds. 

With things being so expensive nowadays it is difficult for most people to save or invest large sums of money every month. So what you can do is to fix a certain amount per month (starting from as low at Rs. 500) that you will invest in Mutual funds. When you give the order to your bank to release a fixed amount per month (just like EMI) towards a mutual fund, this is called a SIP. 

But I think stock market is just a gamble; it's very risky.

Hmm, ok, I can see why you would think that. But SIPs can be made for mutual funds that invest in debt instruments (like bonds and deposits) - which are much less volatile compared to equities. Also, there are Balanced Mutual Funds (which invest in equities and bonds/deposits) as well as Gold Mutual Funds. So you can use SIPs to invest in these funds as well.

Why is everyone promoting SIPs? Is it really that important to an investor's financial portfolio?

SIPs allow the investor to invest small amounts every month. This helps the investor be disciplined in his investing and also helps him reap the benefits of the same. 

The values of shares in the stock market are constantly changing. By regularly investing, the investor averages out the good & bad days on the stock market rather than investing and hoping/praying that the market goes up only. 

So yes, SIPs are very beneficial to an investor's portfolio.

SIPs can now be started online, so it is almost hassle free. Here's a link to an article about starting an SIP online.

Any more queries about SIP? Write to me in the comments section and I'll try and solve them to the best of my ability.

You can also visit this link for a very helpful investor education initiative called SIP Day undertaken by Kotak Mutual Fund & ET Now.

Most importantly:

We spend most of our day working hard to earn money - so please take a few hours a month to learn about how to best invest that money.

It might be tough and confusing in the beginning, but so was your first job, and look how far you've come in that.

So please read up about SIPs, Mutual Funds and investing and talk to your financial advisor before you invest your hard earned money.

 

Why do companies buy back their shares? - Simplifying the jargon

Chaiwallah of Dalal Street 

I'm starting a series of blog posts that will aim to simplify the stock market jargon. Basically convert the big heavy concepts into simpler sounding words for the layman investor - something that the chaiwallah at Dalal Street would be able to understand & explain to others.

Let's start with share buy backs:

While the stock markets are beating records all around, you might have noticed the recent offers by companies to buy back their shares from shareholders. 

Like you, I was also curious about why companies go in for a buy back of their shares. How does it benefit them? Does it benefit the shareholders as well? Many more questions were swimming around in my head. So I pulled out my trusty mobile phone and did a few Google searches and this is what I found out...

1) Just because a company is initiating a buy back of its shares doesn't mean its a good or a bad thing. You need to see the reasons & the prevailing situations behind it.

2) When a company buys backs its shares, it basically reduces the number of shares in the market. This leads to a rise in the Earnings Per Share (EPS). Quite simply put, if there are fewer shares, that means each share gets a larger portion of the company's profit. So this is a positive move for share holders.

3) Companies usually buy back their shares at a price which is higher that the current market price. So the shareholder selling his share back to the company makes more money. Again, a positive move for share holders.

4) Many a times the company's performance is below par and so buying shares back helps boost the performance on the stock markets, since shareholders can see that the company has confidence in itself and its future performance. At this time, a shareholder has to consider whether s/he believes in the long term prospects of the company and so can stay away from the buy back also hoping to reap better gains in the years to come. This is a neutral point; it'll be positive or negative depending on what the shareholder's view point is about the company.

5) Sometimes companies buy back shares because they have surplus cash which they cannot use anywhere else. It's a way in which companies reward their shareholders.

6) And finally, tax advantage, something that we all try to achieve in multiple ways. Companies in India have to pay a 15% dividend distribution tax. Plus, if the shareholder has an income of more than Rs.10 Lakhs from dividends, then s/he has to pay 10% extra tax. By going in for a buy back, the company is able to transfer benefits to the shareholder without any tax burden (since long term gains are tax free in India). Tax saving is always a positive in anyone's eyes.


So next time a company that you own shares of goes for a buy back, consider all the above points before you decide to be a part of the sale or not.
But remember, whether you're the chaiwallah of Dalal Street or the Big Bull, you need to do some of your own homework (research), weigh all the pros & cons and discuss with your financial planner before you finally decide whether to be a part of the buyback or not.
Because remember, there are never any free lunches!!


I hope this post was helpful. Do share your thoughts in the comments section. Thanks.