Equity Systematic Investment Plan or SIP is an instrument that tends to help an individual in avoiding the risk of timing the markets and enable wealth development in an organised or disciplined manner by averaging the cost of investments. Saving which tend to be small could create the big corpus in the long run. SIP enables the individual in building a portfolio on a longer time basis with small investment that are done at regular intervals thus reducing the danger of market volatility.
Individuals have the option of choosing between Quantity based and Amount based SIPs, in Mutual Funds, Stocks, ETFs as well as Gold. Quantity based SIP is a type where a fixed amount of quantity of shares of a desired company is purchased at a predefined frequency while Amount based SIP is a fixed amount which can be decided by the individual intending to invest in selected share at predefined frequency.
Disciplined & Long Term Time Horizon
The formula for calculating Quantity is SIP Amount/Market price of the said share. Fractional value is ignored and the order is placed for the remaining quantity. In the case of Quantity based SIP the quantity which is to be purchased is specified by the individual and is fixed at the time of placement of order according to the desired frequency.
The order value is then calculated depending on the usual market price of the scrip while execution of the order. In order to have a long term wealth development through the equity market, it is essential to have a disciplined and long term time horizon that have integral features of SIP. The following features would make an appropriate choice for equity market –
- Disciplined and simple approach to investment
- Based on concept of Rupee Cost Averaging
- Investment possible with small sum of money invested recurrently to mount up wealth
- Flexible intervals like Daily/Weekly/Fortnightly/Monthly basis
- Flexibility with regards to Amount or Quantity based SIP
While investing in equity funds through SIP, though one will gain the rupee cost averaging benefits at the time of the volatile market phase, one should also avoid investing majorly in aggressive funds such as sector, thematic and mid-cap funds. One cannot guarantee better returns in excessive aggression.
On the contrary it could make your portfolio risky and probably disrupting the life stage with regards to investment goals. However, with mid-caps as a section of the portfolio, majority of it could comprise on large cap funds. Individuals often tend to start SIPs without a second thought on the amount they intend to invest comfortably. Often they try to make up for the lost time and then find it difficult to continue with their SIPs after a period of time.
This results in a stop of their investment and their long term life stage goals. Hence with systematic investment plans one should start conventionally and increase their investment amount gradually over a period of time ensuring stability.