Understanding Systematic Investment Plans (SIPs) for Shares

In this article, we will discuss

• What is SIP in the Share Market?
• How Does a SIP in Shares Work?
• Rupee Cost Averaging: The Prime SIP Advantage
• Types of Stock Market SIPs
• Top Reasons to Opt for a SIP in Shares
• How to Start a SIP?
• Conclusion

For traders, participating in the stock market may involve executing buy and sell orders in quick succession. However, for investors who are in the market for the long haul, stock market participation is an exercise in patience and due diligence. The simplest way to remain invested over the long term is to invest a lump sum amount today and wait for the stocks to appreciate in value.

A more effective way, however, involves investing small sums periodically through a Systematic Investment Plan (SIP). Not sure what a SIP in the share market is and how it works? In this article, we decode the A to Z of systematic investments in stocks, so you can decide if this strategy works for you and get started with your SIP if needed.

What is SIP in the Share Market?

A SIP in the share market is a method of investing directly in specific stocks of your choice. Here, you typically invest a small fixed sum periodically in the stock market by purchasing the shares of your choice. The number of shares you can purchase with each instalment varies as the share price fluctuates. This is an alternative to a fixed lump sum investment made in the stock market.

How Does a SIP in Shares Work?

Systematic investments in stocks are quite simple. You decide which stock you wish to start a SIP in and how much you want to invest periodically in that company. You also decide the frequency of investments (the most common frequency is a monthly plan). Then, based on the current share price, you can purchase stocks in the company chosen.

For example, say you decide to invest Rs. 5,000 each month in a company that you expect will perform well over the long term. If the company’s shares are currently trading at Rs. 100 each, you can buy 50 shares this month. Then, if the shares increase to Rs. 110 each in the next month, you can buy 45 shares in that instalment. In the month after that, if the share price falls to Rs. 94, you can buy 53 shares.

In this manner, the number of shares increases when the price dips and decreases when the price rises. So, with SIP investments in stocks, you do not need to worry about when to enter the market. Instead, you can leverage market cycles to your advantage and continue to invest in the stock market irrespective of how the price fluctuates. This leads us to the primary benefit of SIPs — namely, rupee cost averaging.

Rupee Cost Averaging: The Prime SIP Advantage

As the name indicates, rupee cost averaging is simply the phenomenon of the total cost of your investments averaging out with time. Let us discuss a hypothetical example to understand how this benefit works in a SIP in the share market. Say you invest Rs. 10,000 per month in a company via a SIP. Let us see how the average cost per share will change over 12 months based on price fluctuations in the market.

As seen from the table above, you get to purchase more shares when the price falls (like in July and September) and fewer shares when the price rises (like in February and March). This effectively brings down the average cost per unit, particularly in a bearish market. So, when you invest in direct equity over the long term, you can ride out short-term market volatility and declines and potentially benefit from capital appreciation.

Types of Stock Market SIPs

You can choose from a wide range of SIPs for investing in the stock market. Here are the top SIP variants you can consider for your investments.

• Fixed SIPs

Here, you invest a fixed sum in the company of your choice each month (or each quarter or in any other frequency). The SIP continues for a fixed period and the amount invested in each instalment remains the same.

• Flexible SIPs

In this type of SIP, the amount invested is not fixed. It can be adjusted in each instalment based on your financial situation and your investment plan. Although this is uncommon, you can create a stock market investment strategy that relies on flexible rather than fixed SIPs.

• Top-Up SIPs

A top-up SIP is a method of investing where the amount invested increases steadily at regular intervals. For instance, you may increase your investments by Rs. 1,000 or by 10% each year. This helps you scale up your investments as your disposable income increases.

• Perpetual SIPs

As the name makes it clear, a perpetual SIP in shares does not have an end date. This was originally done by setting up an auto-debit mandate without an end date mentioned. However, recent changes by the NACH cap the duration at 30 years.

Top Reasons to Opt for a SIP in Shares

SIP investments in stocks can be beneficial in many ways. Here are the top reasons to consider this investment strategy for your equity investments.

• Disciplined Investing and Rupee Cost Averaging

SIPs in direct stocks encourage disciplined investing by allowing you to regularly invest a fixed sum in specific shares, regardless of market fluctuations. This approach also leverages rupee cost averaging, where you buy more shares when prices are falling and fewer when prices are rising.

Over time, this strategy can potentially lower your average cost per share and reduce the impact of market volatility on your investment. The automated nature of SIPs also helps overcome emotional decision-making and ensures consistent investments even during market downturns.

• Flexibility and Customisation

SIPs in direct stocks also offer great flexibility because you can start with small amounts and gradually increase your investment as your financial situation improves. This accessibility makes it easier for beginners and those with limited funds to build a portfolio of individual stocks.

You even have the freedom to choose specific companies you believe will grow over the long term and adjust your investment strategy as needed. This level of customisation allows you to align your stock portfolio precisely with your investment goals and risk tolerance.

• Direct Ownership and Potential for Higher Returns

By investing in direct stocks through SIPs, you become a partial owner of the companies you invest in. This direct ownership can potentially lead to higher returns compared to other investment vehicles, as there are no intermediary fees eating into your profits.

You also have the opportunity to benefit from company-specific growth, dividend payments and potential stock splits. Also, while individual stocks can be more volatile, the SIP approach helps mitigate some of this risk through regular and systematic investing.

• Learning Opportunity and Market Engagement

Opting for SIPs in direct stocks also provides an excellent opportunity to learn about the stock market, company fundamentals and different investment strategies. As you regularly invest in your preferred stocks, you'll likely become more engaged with market news, company performance, and economic factors affecting your investments.

This hands-on approach can help you develop valuable investing skills and knowledge over time, potentially making you a more informed and confident investor in the long run.

How to Start a SIP?

Investing in stocks through SIPs is fairly straightforward. Here is a generic guide to help you get started with your stock market SIPs.

1. Choose a reliable stockbroker or trading platform that offers SIP facilities for direct stocks.
2. Open a trading and demat account if you don't already have one.
3. Select the stocks you want to invest in based on your research and financial goals.
4. Decide on the amount you want to invest regularly and the frequency.
5. Set up the SIP through your broker's platform by specifying the stocks, investment amount, and schedule.
6. Ensure sufficient funds are available in your linked bank account on the scheduled investment dates.
7. Monitor your investments periodically, but avoid making frequent changes based on short-term market fluctuations.
8. Review and adjust your SIP strategy annually or when your financial goals change.

Conclusion

This sums up all you need to know about SIPs in stocks. The first step, as needed for any stock market investment, is to open a demat and trading account. Samco Securities offers a secure demat account to hold your investments electronically and a feature-rich trading account that gives you access to the Samco trading app. Even if you already have a demat and trading account, switching to Samco is quick, easy and hassle-free.

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