What Does SIPs In Stocks Mean And How It Works
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Anything we read or hear today has a reference to the ongoing pandemic and how it has affected almost everything in our lives. So, not talking about something that we already know, I’ll simply point out things that are relevant for us to understand SIPs in stocks. The pandemic has led to record number of DEMAT account openings by retail shareholders (common people); record number of trading activity done by retail shareholders (common people); penny stocks going through the roof; and stocks with poor quality balance sheets and inconsistent earnings getting a lot of traction.
This phenomenon has been observed not just in the Indian stock market but across the globe. With so many retail investors pouring their hard-earned money in the equity markets, it is extremely important that they do it in the right manner and protect their capital from losses.
Even though SIP in stocks has existed for quite some time now, with so many new people entering the markets, it has become the need of the hour.
So, what does SIP in stocks mean, and how does it work?
SIP in stocks simply means to invest a fixed ‘quantity’ in a particular stock on a regular basis, could be monthly, quarterly or even once in six months. Earlier, when there wasn't any such facility, very few people used to do it by themselves—call the broker to do the needful or login to the trading platform to invest. With advancement in technology, many broking platforms now offer the SIP in stocks feature where anyone can set up an auto-debit mandate and on set dates, stocks would be bought in their DEMAT accounts.
For instance, consider Mr. X, who wants to buy 1 share of Company A every month, then he can start a SIP in Company A along with an auto-debit mandate using the broker app. On the set dates, money will automatically be debited from Mr. X’s bank account and 1 share of Company A will be bought for him.
What are the advantages of SIP in stocks?
Disciplined Investing approach: SIP will help you invest your money automatically on your set date, thereby helping you create wealth in the long term.
Built-in auto step-up: With increase in income, your investments should go up too. When you do SIP in stocks, this is taken care of as quality stocks slowly and steadily keep going up, thus making your investment larger and larger.
Wealth creation with small periodic investments in the form of SIPs: SIP will help you grow your wealth by investing small amounts from your income regularly in quality stocks via baskets.
One SIP for every goal: If you are investing for your retirement, your dream home, your children’s education, then it is all covered. With stock SIPs, you can start goal-based SIPs too.
Risk aversion with SIP: It helps you as an investor to invest regularly in diversified baskets or mini portfolios of stocks thereby reducing the risk of timing the stock market.
Power of compounding: Investing in the right stocks for a long time gives you an edge with the power of compounding which ultimately helps in long term wealth creation.
Now that we have established that SIP is one of the best ways to invest, it is equally or rather more important to understand what kind of stocks you should do SIPs in. SIP is just the manner in which you invest your money, where you invest the money is a totally different ball game. If you do SIP in poor quality stocks, you will earn poor returns or even risk losing your capital, but if you invest in good quality businesses, you will generate disproportionate returns in the long run.
Even though history shows that SIP in good quality stocks has helped investors generate superior returns, it is important to know and understand that not all of your investments should be in just one stock no matter how great the company is. If an unforeseen event occurs that affects that company or its industry, your entire investment will be at risk.
The most ideal way to invest is to do a SIP in a portfolio of stocks intelligently created by market experts who understand the market dynamics and diversification principles to generate superior returns at comparatively lower risk. Many brokers have started providing such platforms where investors can invest in baskets of stocks created by market experts and even start SIP in them.
An equity SIP in the expert-curated ready-made baskets of stocks is the perfect icing for investors.
SIP in stocks helps you smartly maneuver downturns with less risk and enables you to make returns without having to time the markets.