Investing in Equity Systematic Investment Plans (SIPs) has become increasingly popular over the years as a means to accumulate wealth in the long term. While Mutual fund SIPs lead to higher diversification; Stock SIPs offer a higher risk-returns to investors. In this blog, we will explore why investing in equity SIPs is a smart move and back it up with numbers.
What is Equity SIP?
In an equity SIP, investors can invest a fixed amount of money at regular intervals, such as weekly or monthly which is then used to purchase units of Equity stocks. In Paytm Money, users can invest either a fixed predesignated amount or quantity into Equity SIP:
Top 5 reasons to invest in Equity SIPs:
The goal of an Equity SIP is to accumulate wealth over a long period of time through systematic investing, regardless of market fluctuations. This will help you in inculcating the concept of financial discipline, promote the habit of saving, and leverage your time in the market rather than attempting to time the market:
- Disciplined Investing
The discipline of Equity SIP lies in the fact that you commit to investing a fixed amount of money at regular intervals, regardless of the market conditions. This helps you in avoiding emotional decisions or the temptation of trying to time the market and making impulsive investment decisions.
- Rupee Cost averaging
Let us understand this concept with an example:
An investor decides to invest Rs. 5,000 per month in the stock of TCS through a SIP for 12 months, starting in January. Here is how rupee cost averaging works in this scenario:
| Month | Prevailing Share price | Quantity purchased in SIP for Rs 5000 SIP | Net Qty | Net average share price | Total amount invested till now |
|---|---|---|---|---|---|
| January | Rs. 2,500 | 2.00 | 2.00 | 2,500 | 5000 |
| February | Rs. 2,000 | 2.00 | 4.00 | 2250 | 9000 |
| March | Rs. 2,500 | 2.00 | 6.00 | 2333 | 14000 |
| April | Rs. 1,800 | 2.00 | 8.00 | 2200 | 17600 |
| May | Rs. 2,000 | 2.00 | 10.00 | 2160 | 21600 |
| June | Rs. 1,500 | 3.00 | 13.00 | 2008 | 26100 |
| July | Rs. 2,000 | 2.00 | 15.00 | 2007 | 30100 |
| August | Rs. 1,600 | 3.00 | 18.00 | 1939 | 34900 |
| September | Rs. 2,000 | 2.00 | 20.00 | 1945 | 38900 |
| October | Rs. 1,400 | 3.00 | 23.00 | 1874 | 43100 |
| November | Rs. 2,000 | 2.00 | 25.00 | 1884 | 47100 |
| December | Rs. 1,200 | 4.00 | 29.00 | 1790 | 51900 |
At the end of 12 months, the investor has invested a total of Rs. 51,900 in the stock of TCS through the SIP. The average price paid by the investor for each share of TCS is Rs. 1,790, which is calculated by dividing the total amount invested by the total number of shares purchased.
Rupee cost averaging has helped the investor to buy more shares of TCS when the price was low and fewer shares when the price was high, resulting in an overall lower average cost of investment:
- Compounding
Here’s an example of how equity SIPs can help in compounding:
Suppose you invest Rs. 10,000 every month in an equity SIP for a period of 20 years, assuming an average annual return of 12%. Here’s how your investment would grow over the years:
- At the end of 5 years, your total investment would be Rs. 6 lakhs, however, your investment value would be around Rs. 10 lakhs.
- At the end of 10 years, your total investment would be Rs. 12 lakhs, however, your investment value would be around Rs. 26 lakhs.
- At the end of 20 years, your total investment would be Rs. 24 lakhs, however, your investment value would be around Rs. 1.4 crores.
You see, despite investing the same amount of Rs. 10,000 every month, your investment value grows exponentially over the years, thanks to the power of compounding.
- Diversification
During market fluctuations, some stocks may perform well while others may not. Equity SIPs, if invested across different sectors, market caps, etc. creates a diversified portfolio of stocks, reducing the overall risk of the investment and providing better chances of generating higher returns. This diversification helps in reducing the risk associated with investing in a single stock or a particular sector or industry.
- Manageable Tranches
One of the most attractive features of Equity SIP is that one can start investing even with an investment as low as Rs 500. This means no matter how tight your budget is, you can still invest and build wealth over a longer period of time, provided you stay consistent and let the power of compounding work its wonders.
How to start a stock SIP on Paytm Money?
- Go to your desired company/stock page and click on 3 dot icon
- Click on Start SIP
- Select the frequency of SIP – Weekly / Monthly and add the quantity/amount based on your desired SIP type. Also, add the SIP trigger day/date of the month
- You’re set! Additionally, you can add Autopay to have an automatic retrigger of funds from your bank account
To sum it up, Equity SIP is a useful investment strategy for those looking to invest in the stock market over an extended period. It offers several benefits, including regular investments, the power of compounding, and minimized impact of market volatility. These factors make Equity SIP a simple and effective way to build wealth gradually while reducing the risk of market timing. By investing small amounts regularly, individuals can achieve their long-term financial goals and create a secure financial future.
Disclaimer: Investments in the securities market are subject to market risks, read all the related documents carefully before investing. The securities are quoted as an example and not as a recommendation. This content is purely for information purpose only and in no way to be considered as an advice or recommendation. Paytm Money Ltd SEBI Reg No. Broking – INZ000240532. NSE (90165), BSE(6707) Regd Office: 136, 1st Floor, Devika Tower, Nehru Place, Delhi – 110019. For complete Terms & Conditions and Disclaimers visit: https://www.paytmmoney.com/stocks/policies/terms
