How Equity SIPs Can Assist You in Achieving Big Financial Goals

It's time to finally tackle those big financial goals and fulfil your dreams! How? By reaping the benefits of Systematic Investment Plans (SIPs). While the term ‘SIP’ is usually associated with mutual funds, there is another way that you can benefit from this investment strategy. And that is through equity SIPs. Also known as stock SIPs, equity SIPs are underrated and often overlooked by investors.  But these can be stepping stones in making your financial dreams a reality.

Let's dive deep and understand what stock SIPs are, how you can benefit from them, and how to get started.

What is a stock SIP?

A stock SIP is an investment plan that allows you to make small investments in a stock or equity at regular intervals. This means that, instead of investing in mutual funds that divide your investment across different equities, you will concentrate your investment in one equity stock. A stock SIP lets you directly enjoy the benefits of the equity market's growth potential.

Difference between stock SIP and mutual fund SIP

Stock and mutual fund SIPs can seem similar, but the two have some key differences.

#1. Diversification

With a mutual fund, you invest across different stocks and diversify your investment portfolio. When you invest through a stock SIP, you select an individual equity stock and invest in it through an SIP.

#2. Choice

A mutual fund does not allow you to select which equities and stocks you invest in. Your fund manager makes this choice. However, when you choose a stock SIP, you invest in an equity stock and align your investment to your specific goals and risk appetite.

#3. Expense ratio

Mutual fund SIPs have a higher expense ratio as they cover the operational costs of the funds. Since you invest directly in a stock SIP, you avoid all the additional charges of a mutual fund, lowering the expense ratio.

Benefits of investing in stock SIPs

A stock SIP could be just what you need to achieve your big financial goals. Many advantages of equity SIPs align with the requirements to fulfil your cherished economic pursuits. Here is why this could be an appealing investment option.

#1. Suits long-term investment

Big financial goals are often long-term goals. The equities market shows a significant growth in the long term. A regular stock market investment may lock in large sums of your money for long periods. However, stock SIPs allow you to benefit from the long-term growth potential of equities without investing a large sum at once. This way, you can start with small amounts and allow the compounding effect to grow your investment.

#2. Discipline

Big goals are achieved through discipline and consistency. This discipline is precisely what equity SIPs inculcate by requiring you to make small investments at regular intervals. They lead you towards your goals one SIP payment at a time.

#3. Compounding

Compounding is responsible for the high returns of SIPs. This means that when you invest in equity, the returns yielded are reinvested. When returns are calculated in the next period, it is based on your initial investment and the reinvested return, generating additional returns over time. Compounding has a snowballing effect and increases the value of your investment exponentially.

#4. Rupee cost averaging

Rupee cost averaging minimises the risk of short-term market volatility by adjusting the number of stock units bought based on their Net Asset Value (NAV). When the NAV is low, you are allocated more units. When the value is high, you get fewer units. Your equity SIP frequency averages out the cost of your investment, making it suitable for the long term by mitigating timing risks.

#5. Easy management

Stock SIPs are passive investment instruments. Unlike traditional stock market investments, you do not have to monitor your stock SIP constantly. Rupee cost averaging and compounding effects prevent the risks of day-to-day fluctuations, allowing you to sit back and relax while benefiting from your investments.

#6. Low expenses

The expense ratio of stock SIPs is lower than mutual funds since you do not pay intermediaries to manage your investment. Stock SIPs further reduce expenses by removing exit load and maintenance charges.

Understanding the risks

Like all investment opportunities, stock SIPs also involve a degree of risk. Understanding these risks is the first step to making intelligent investment choices. Here are some points to keep in mind. 

#1. The risk of concentration

Concentration is essentially putting all your eggs in one basket and a profound risk to consider with stock SIPs. Concentration occurs when you invest in just one equity over a long period. It makes your investment vulnerable to market fluctuations and increases the risk of losing capital in unfortunate market events.

#2. Liquidity

Certain stocks are more liquid than others. Investing in low-liquidity stocks could impact your ability to exit the market quickly and subject you to undesirable market conditions.

#3. Lack of expert management

If you are new to SIP equity, mutual funds or investments in general, they could be tricky waters to navigate. After all, with equity SIPs, you’re responsible for managing your investment, setting aside personal biases, and understanding your goals and associated risks. You can overcome this risk if you put in the right amount of research and care before you commit to investing in equity SIPs.

How to get started

#1. Understand and clearly define your financial goals.

#2. Evaluate your risk appetite.

#3. Research and identify stocks that will help you meet your goals.

#4. Select a trustworthy broker that offers stock SIPs and registers online.

#5. Start your SIP with the first payment. Select the amount, SIP frequency, and duration of your SIP according to your goals.

Selecting the right stock for a stock SIP

Selecting the right equity stock for your stock SIP is one of the most important steps. While it is challenging to predict how equity will perform in the future, there are some things you can keep in mind to ensure that a stock is the right one for you.

#1. Understand the industry

When you select a stock, assess the industry that it belongs to for its growth potential and sustainability in the long term.

#2. Analyse metrics

The performance of stocks is measured using several ratios like the ROE (return on equity), P/E (price to earnings), and P/S (price to sales). Analyse these metrics and compare them to ratios of other stocks to evaluate performance.

#3. Get a professional opinion

Researching and analysing stocks can be confusing and time-consuming. Professional advice from reputed financial advisors can save you time and ensure you make the best financial decisions for your long-term goals.

To conclude

Stock SIPs are an excellent investment opportunity to help meet big financial goals. Stock SIPs combine the growth potential of equity stocks with the benefits of an SIP, giving you the perfect investment instrument. And an easy way to begin your financial journey with stock SIPs is with the Tata Capital Moneyfy website or Tata Moneyfy's SIP App.

So don't wait any longer! Start your stock SIP journey with Tata Capital Moneyfy today!