Selection of stocks and decision of the right price to enter is an integral part of equity investment and this is the step where most of the investors falter. Equity Systematic Investment Plan (SIP) is an instrument which helps you avoid the risk of timing the markets and facilitate wealth creation in a disciplined manner by averaging cost of Investments. Small savings create the big corpus for future. Let's find out what a SIP is and what are its benefits.
What is SIP?
Systematic Investment Plan enables you to build a portfolio over a longer time horizon with small investments at regular intervals reducing the risk of market volatility. You can choose between Quantity based and Amount based SIPs in Stocks, Mutual Funds, ETFs and Gold.
Amount Based and Quantity Based SIP
Amount based SIP - It's a type wherein a fixed amount (decided by you) is invested in your selected share at pre defined frequency.
Formula for calculation of Quantity is SIP Amount / Market price of the share. Any fractional value will be ignored and order will be placed for the remaining quantity.
Quantity based SIP - It's a SIP type wherein a fixed quantity of shares of your desired company is purchased at pre defined frequency.
In Quantity based SIP, quantity to be purchased would specified by you and would be fixed while placement of orders as per your desired frequency. The order value is calculated based on the prevailing market price of the scrip at the time of order execution.
Features of SIP
For long term wealth creation through equity market you need discipline and long term time horizon which are inherent features of SIP. The following features of SIP makes it fit for equity market.
1. Simple and disciplined approach towards investment
2. Investment possible with small sum of money invested regularly to accumulate wealth
3. Based on concept of Rupee Cost Averaging
4. Flexibility in terms of Amount or Quantity based SIP
5. Flexible intervals like Daily/ Weekly/ Fortnightly/ Monthly basis
Benefits of SIP
As common investor doesn't have enough time and resources, SIP proves to be a viable option for them. Listed below are the important benefits of this instrument.
1. Reduces Risk because of Rupee Cost Averaging
2. SIP can be started with very small amount of money
3. Timing the market is not necessary
4. Long term financial goal can be aligned with SIP
5. Disciplined approach towards Investment helps in controlling the emotions
Selecting Companies to Invest In
Once you have decided to go for SIP the very next question which pops up is the stock selection. The thumb rule is to go for the companies you want to own if given a chance. Some stocks are great for the SIP mode of investing. These are stocks we should accumulate, in small steps as they represent long term value. They are companies which have proven track record. These companies have a solid, stable and ethical management and operate in profitable area with long term growth prospects. Best strategy is to go for blue chips like SBI, Reliance, ICICI Bank, Infosys etc. If you do not want to go for equity SIP you can also choose Mutual Fund SIP's where you are relieved of the individual company research.