Have you ever heard of SIP in shares? Equity SIP, or stock SIP, or SIP in equities is similar to mutual fund SIP. Equity SIP is a systematic investment plan where a certain amount is invested in the shares of a company on a regular basis, say monthly, fortnightly or quarterly.
Read on to learn all about equity SIP, how it works, its benefits, how to set up an equity SIP, ideal for whom and which brokers are best suited for equity SIP investments. The article also explains the difference between SIP in equities and mutual funds.
Before we proceed, let us first understand what equity SIP means.
Buy at low and sell at high is the key to make profits in the stock market. The problem, however, is how to identify that the stock is trading at its low point or it won’t fall any further. Since the market is very volatile, it is almost impossible in practise to buy shares at the lowest price. Equity SIP (Systematic Investment Plan) is the right solution to this problem.
Let's understand what equity SIP or stock SIP is.
Equity SIP, as the name suggests, simply means SIP in shares. In equity SIP, you can invest a fixed amount of money at regular intervals such as weekly, monthly, quarterly etc. Stock SIP is an investment strategy that allows you to systematically invest in the stock market through the SIP mode. You can set up a stock SIP for different time periods, e.g. monthly, quarterly, half-yearly, etc.
Unlike investing all your money at once, where you buy shares at a particular price, in a stock SIP, you buy a company’s shares at different prices at different intervals, eliminating the risk of timing the market.
How to do SIP in equity stocks?
You can do stock SIP by quantity or by investment amount. The decision is yours!
Quantity-based Stock SIP: When you purchase SIP by quantity, you place an order to buy a fixed number of shares every interval. Say you have set up an SIP to purchase 20 shares of TCS every month. In SIP by quantity, every time a specified number of shares are purchased at the prevailing stock price, so the amount deducted will vary.
Amount-based Stock SIP: When SIP is done by amount, a fixed amount is invested periodically. Say you have purchased an SIP wherein you will invest a specified amount say Rs 1000 every month in a company. In this, amount deducted from your bank account every time is fixed but the number of shares you get in every transaction will vary.
How does Equity SIP works?
Let’s understand how SIP works in stocks with an example;
Suppose, a stock is currently trading at 30% low from its 52 week high. Now assuming that the stock caught its low, you have bought 120 shares of the company at Rs 50. Your total investment amount is Rs 6000. Now, in the next month, the share prices further fell to Rs 40, so your investment will be in 20% loss worth Rs 1,200.
Amount invested = 120 shares * 50/share = Rs 6000
P&L= Investment Value – Current Value
(120*50) – (120 * 40) = Rs 1200
In the same scenario, if you have invested the same capital Rs 6,000 in the company via an equity SIP of Rs 3,000 per month.
Total Equity SIP Investment = Rs, 6000
Number of shares you own in SIP Mode= 60 + 75 = 135 shares
Cost of holding per share = Rs 6000/135 shares = Rs 44.44/share
P&L on equity SIP = Investment Value – current value
To conclude, in Equity SIP, you will have more shares (135) at a lower per share cost of holding which is Rs 44.44 in the given scenario. Also, you can minimize your losses as the investor is in 10% loss in equity SIP mode of investment, which is 20% loss on lumpsum investment.
Equity SIP is an investment strategy to invest in the shares of a listed company in a disciplined manner.
To buy shares in SIP mode, all you need to do is set up a stock SIP with your broker. For this, you need to specify your preferred stocks that you want to buy, the frequency of SIP (monthly, quarterly, etc.), the date of SIP investment and the SIP amount or the number of shares to be bought. Once the SIP order is successfully submitted to your broker, your bank will be instructed to debit the predefined amount at regular intervals and the amount will be invested in the shares.
Similar to mutual fund SIP, where the SIP amount is debited by your bank every month and invested in the mutual fund, SIP in equities also works in the same manner.
So, SIP in equities is a hassle-free way to invest in the stock market.
Let find out some important reasons why one should do a SIP in stocks or what are the benefits of a stock SIP;
SIP is a disciplined approach to investing: SIP investing is all about investing a fixed amount of money on a regular basis, thereby developing a regular investment habit. Since SIP can be done even with small amounts, it is the best way for small investors to invest in equities.
Rupee cost averaging: This is one of the main advantages of equity SIPs. In SIP, the amount is systematically invested at every interval, irrespective of the market conditions. You get more shares when prices are low and fewer shares when prices are high. However, in the long run, it helps reduce the overall cost of holding per share and offers your portfolio the benefits of rupee cost averaging.
Potential to generate high returns over the long term: The market is extremely unpredictable and volatile in the short term, but a long-term investment in the stock market through the SIP route has the potential to offer you high returns with the power of compound interest. However, there is no guarantee of returns and they depend on market volatility, economic factors, performance of the company i.e. profitability etc.
Eliminates market timing risks: When you make a one-time lump sum investment in stocks, you need to time the market so that you buy the stocks at their lowest point. However, with a SIP investment in equities, the investments are made regularly, eliminating the risk of market timing.
Who should do SIP in Equity Stocks?
Well, equity SIP is not recommended for everyone. Equity SIP is best suited for long-term investors.
Individuals who wish to invest in the stock market but do not have the expertise to time the market can take out an equity SIP in stocks. This allows them to invest in a systematic and disciplined manner.
Also, you must have an investment horizon of 5 years or more to do an equity SIP. A SIP for a short-term period can be risky and you may lose your capital.
Before you start a stock SIP, you must realize that the stock market is volatile and the invested capital will also fluctuate according to the changes in the stock price. So, you must have a medium to high risk appetite for equity investments. The stocks for the SIP also need to be chosen carefully as extremely volatile stocks or an SIP in a poorly performing company can lead to losses.
List of Stock Brokers offering Equity SIP or Stock SIP
You simply log in to the broker’s trading platform, select the stock or list of stocks for SIP, and create an SIP order online. Brokers allow customers to set up an equity SIP for free and there are no additional brokerage fee charged by them.
Direct lump sum investments in shares are very risky, as you have to take market timing into account when buying shares.
However, with an equity SIP, you invest in stocks regularly, so you do not need to time the market. The shares are bought at different intervals in different scenarios, sometimes the prices are low, sometimes high, so you can manage the overall cost per share.
However, you need to systematically invest in the stock market through SIP for at least 5 to 7 years to expect good returns.
Equity SIP Vs Mutual Fund SIP
Equity SIP is same as that of investing in mutual funds but there are some differences too. Here is the brief comparison between the two;
Equity SIP is a disciplined approach to investing in the equity market. SIP in shares with rupee averaging benefits has the potential to offer great returns in the long run.
Market novices can invest through the SIP route and mitigate the risk of market timing. Staying invested for the long term through SIP proves to be an effective approach to wealth creation.
Frequently Asked Questions
On the top, click on SIP option.
Enter SIP name and tap on Create basket
Select the stock/s you want to invest in via SIP.
Select the basket and specify the SIP date and time.
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