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Benefits of Equity SIP

  • Apr 01, 2019

Benefits of Equity SIP

Equity stocks are highly risky yet offer high returns amongst all other asset classes. It is a preferred investment vehicle for high-risk tolerance investor who wants to put in the lumpsum amount. On the other hand, if you’re a first-time or a naïve investor who is ready to take the risk can opt for equity SIP that gives you the opportunity to purchase shares periodically in a systematic manner.

What is Equity SIP?

Systematic Investment Plan or SIP is instrumental in helping you mitigate the risk of timing the market and facilitates wealth creation in a disciplined manner. Equity SIP helps you build a portfolio by letting you invest a small amount at periodic intervals – monthly, weekly, or quarterly - over a longer time horizon. As an investor, you can choose between Amount- based SIP and Quantity based SIP. •

Amount based SIP is where a fixed amount in invested in a particular share for a specific time, and it is calculated by dividing SIP amount by market price per share. •

While the Quantity based SIP is where an investor purchases a fixed quantity of shares for a specific timeframe.

Let’s take a look at some of the benefits of equity systematic investment plan.

Benefits of Equity SIP:

Minimises Volatility Risk: Equity SIP reduces risk using the concept of rupee cost averaging. It is an approach where you invest a fixed sum at regular intervals. This means you buy more units of stocks when the price is low and fewer units when the price is high. It helps you overcome market fluctuations. •

Helps to Meet Long-Term Goals: It is beneficial for salaried individuals who want to achieve long-term goals without investing lump sum amount. Investors can start with a small amount of money to invest in the best equity stock. •

Inculcates discipline SIPs are regular investments, which can be scheduled at a predefined day every month. SIP amounts are withdrawn automatically out of your bank account. This makes your savings more disciplined as your savings are withdrawn even before you plan your expenditure for the month. •

Ideal for Long-Term Investments: Equity SIP is ideal for long-term passive investors who do not have market expertise. You can benefit from the power of compounding in the long run and build a sizeable corpus over time. •

SIP Is Flexible: As an investor, you experience flexibility in terms of amount, time period and quantity. You can decide how much money you want to invest at each interval, as well as evaluate how much gap should be there between two investments. However, if the regular amount is invested, there are higher chances of gaining good yields in the long run. •

Rupee Cost Averaging All your savings through a SIP are safeguarded by Rupee cost averaging. Rupee cost averaging helps you overcome market fluctuations and volatility. A SIP automatically allocates you more units when stop prices take a dip, and reduce your units if stock prices rise thereby, averaging out your savings. •

Power of compounding SIPs boost your savings by reinvesting your gross investment. SIPs also average out the cost of buying Mutual Fund units. The earlier you start, the better it is as you can benefit from the power of compounding. •

Small Ticket Size If you try to build a diversified portfolio with all types of stocks by buying them directly, you’ll need a relatively large sum of money- at least several thousands to begin with. In Mutual Fund, you can start by owning the same with a few thousand rupees.

Once you have decided to opt for equity SIP, the next step is the selection of the right stock. When choosing a stock, you should always opt for the one that would be great for the SIP mode and try accumulating such stocks in small steps until they grow in value in the long run. It is always recommended to select financially stable companies that operate in a profitable area with long-term growth prospects.

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