Investment of any kind needs discipline to invest methodically to build wealth. It requires investors to develop a healthy savings habit and a systematic approach to invest regularly. SIP or systematic investment plan is enjoying a growing acceptance among millennial investors, who don’t want to go in length to investigate the market every time they invest but at the same time want to reap the benefits of investing in the equity market. Equity SIP is a specially designed investment tool that allows interested investors to invest in stocks and equity index like Mutual Fund SIP. It is different from the conventional share market investment and offers certain advantages. How? We will discuss that in this article.
What Is Equity SIP?
SIP stands for systematic investment plan. And, equity SIP stands for setting up a regular investment plan to invest in the equity market, as you do for mutual funds. The result is wealth-building over a period of time by averaging out market risk and amplifying return.
Equity SIP allows investors to invest in the stock market systematically. Many brokers now enable clients to invest in stock SIPs through their platforms. Like mutual funds, Equity SIPs allow investors to put their funds in shares, index exchange-traded funds (ETFs), and gold exchange-traded funds in a regular manner. Instead of investing in lumpsum, investors spread their investment and invest in monthly instalments. Equity SIP allows a couple of advantages, one of which is rupee cost averaging. It lets investor’s portfolio to grow to a sizable volume with small investments, which adjusts each month based on current market condition.
Equity SIP can offer better returns on investment than mutual funds since it invests heavily on high yielding shares and stocks, and other traded commodities.
What is the rupee cost averaging?
One of the many advantages of systematic investment plan or SIP is rupee cost averaging. Like in mutual funds investment, investors now can leverage the benefit of rupee cost averaging in Equity SIP as well. To understand the advantages of Equity SIP, you must realise how rupee cost averaging helps in building your wealth.
Rupee cost averaging is a method of investing fixed instalment in any scheme regularly, say monthly. Since the investment amount is fixed and consistent, more units get allotted to the investor when the market is low and less when the market is high. Through this process, risk gets spread out over the investment period, and at the same time, the reward gets optimised.
It is a method to eliminate risk exposure due to sudden market movements but helps portfolio value to grow over long-term investment.
Let’s understand it better with an example. Following is an investment chart for six months.
|SIP No.||Month||NAV Value||No. of Units|
Rupee cost averaging is calculated on NAV. See in the chart how the number of units allotted fluctuates with the fluctuation in NAV.
Equity SIP allows you the advantage of rupee cost averaging. Every month, with new investment, new units get added to your SIP account based on NAV value.
Why is Equity SIP the right choice?
- There are several advantages of selecting Equity SIP (ESIP) over traditional stock investment. For instance, you can set the frequency of investment as monthly, weekly, or daily; as per your convenience. Your broker will do the rest of the legwork.
- This service is broker specific, meaning the role of choosing the right stocks for investing and selecting the number of shares resides with the broker. As a result, several big broking houses now have enabled equity SIP in their platforms.
- Equity SIP is also light on your pocket. You can select an investment amount as per your convenience. However, your broker might also suggest a minimum investment amount, according to your investment goals.
- You can select the stocks that you want to buy. You can choose to buy stocks from a single company or build a portfolio with shares from different companies across sectors. If you buy shares from different companies, you need to register them all under ESIP.
- You have the flexibility to choose the number of shares you want to purchase each month and adjust investment amount accordingly. Conversely, you can also invest a fixed amount each month and buy stocks based on market condition.
- Equity SIP is meant for long term investors. It helps you achieve your financial goals by generating a stream of earning for over a period. Unlike equity traders, ESIP investors don’t have to plan entry and exit in the market.
- It helps you optimise profitability and lower drawdowns/losses. It allows you to take equity-specific approach during a volatile market.
Types of Equity SIP
There are two broad categories of Equity SIP.
- Amount based SIP:In amount-based SIP, the investment amount remains the same. It is calculated by dividing the instalment amount by the market price of the share at that time. Accordingly, units get allotted to your portfolio.
- Quantity based SIP:You can buy a fixed amount of shares for a fixed duration, and accordingly, the investment amount is determined.
How to set-up an Equity SIP plan
It will depend on your service provider. Some brokers have automated the process that allows you a DIY platform to select right Equity SIP plan for yourself. You can choose stocks, adjust your investment amount or number of shares, and set a SIP plan. You can improve your profit margin by accessing the market reports, analysis, and tips shared by your broker.
Equity SIP in a nutshell
Equity SIP is a process of investing in stock market systematically with regular small instalments. It is an approach to accumulate stocks in a phased manner, helping investors, who aren’t regularly connected to the market to build wealth through long-term investment in stocks. However, Equity SIP comes with its own set of limitations.
It demands close observation and monitoring from the investors to check where the market is going to adjust their investment goals. Moreover, the investor may feel tempted to include several stocks to their portfolio and eventually lose sight from the main objective.
It works better for stock pickers. If you select the wrong stocks, you’re likely to incur a loss on your Equity SIP.
Equity SIP is less intimidating than investing in stocks directly. It simplifies stock investment and allows you the flexibility to invest in any market condition. You can pause your SIP plan anytime you are facing financial crunch and resume it when you feel right.