Investing in the stock market can be both exciting and intimidating. While the potential returns are high, so are the risks if you do not approach it the right way. For DIY (do-it-yourself) investors who are looking to build wealth over the long run through direct equity investments, a systematic investment plan or SIP is one of the most effective tools. This article explores why a stock SIP is a must-have and how it compares to lumpsum investment.
What is a stock SIP?
Starting an SIP allows you to invest a fixed sum in equity mutual funds or direct stocks at regular intervals, usually monthly. For example, you can set up a SIP of Rs. 5000 that will automatically deduct Rs. 5000 from your bank account on the 1st of every month and invest it in the equity scheme or stocks you have chosen. By investing the same amount regularly, a SIP helps you take advantage of rupee cost averaging.
The power of rupee cost averaging
One of the biggest advantages of an SIP is that it helps average out the cost of your investments over time. When the markets are down, your fixed SIP amount will buy more units since the NAV is lower. And when markets are up, you will get fewer units. This rupee cost averaging evens out the average price you pay over the long term.
Disciplined investing for better returns
Many DIY investors tend to make emotional and irrational decisions in a lumpsum investment. They usually put all their money when markets are high and fearful when they are down. This behavior ends up locking in losses. An SIP enforces discipline by spreading out your investments and eliminating emotions from the process. It forces you to invest regardless of market moves through automated deductions. This improves your chances of generating better long-term returns.
Retirement planning made easy
Stock SIPs are very useful for long term goals like retirement which are 15-20 years away. Through recurring small sums, you can create a sizable retirement corpus without worrying about market volatility or timing your investments. Many Indian families still do not have enough provision for retirement. But through consistent SIPs in their 20s and 30s, individuals can accumulate a large enough sum to support themselves and family after retirement without being dependent on others.
Better than lumpsum for most goals
While lumpsum investing has its place for specific goals 5 years away or less, a stock SIP is usually a more prudent approach for goals like retirement, child education, marriage that are 10-15 years in the future. This is because it eliminates timing risk and lets you benefit from market corrections through rupee cost averaging. Opening an SIP of Rs. 10,000-15,000 can help regularly build healthy corpus for multiple long-term goals simultaneously without taking on huge market risks associated with lump sum investments.
Conclusion
Through disciplined monthly investments and rupee cost averaging, SIPs help eliminate emotions, average out costs and maximize the power of compounding returns. For achieving long term goals like retirement that need 15-20 years of planning horizon, stock SIPs should be an integral part of one’s investment strategy. Starting an SIP early and sticking with it through ups and downs can truly help transform your financial future.
