Systematic investment plans, or SIPs, are popular investment terminology. SIPs have been touted as being the ideal way to invest and build wealth over the long term.
Every investment expert talks about SIPs so that investors might think they are the cure to all ills. But is investing systematically really as great as it is made out to be?
1. What is SIP?
A Systematic Investment Plan is one where you can invest a fixed amount of money into your smallcase at specified time intervals. The SIP feature is aimed at aiding you in developing a disciplined investment habit.
The concept of SIPs is focused on the philosophy of “Save First, Spend Next.”
2. SIP vs. Lump-sum
Lump-sum or, simply put, investing a specified amount of money in one go would involve a lot of brain-wracking, and as an investor, you would be hooked to time the market, i.e., to invest when the markets are down or during a correction.
However, as Nick Murray says … “It is all about time spent in the market and not timing the market.”
Whereas, with a SIP, you can invest small amounts at fixed intervals (weekly, monthly or quarterly) instead of making a one-time investment, and you do not need to worry about timing the market. Also, you don’t need to have a large amount of money to get started.
3. Generating wealth with SIP?
With a SIP, you can get started with your investment with a small amount and reap significant returns in the long run. It’s simple and the most convenient way of investing in the financial markets. In addition, SIP’s have benefits that would help you generate wealth.
A. Protect yourself against market volatility
Timing the stock markets is one of the most challenging things for an investor to do. Often, it is also not necessary because of the risks it carries. Investors often worry about when and how much to invest. SIPs take this worry away. A systematic investment plan is a disciplined way of investing a fixed amount at regular intervals. By eliminating the need to monitor the markets constantly, it helps protect the portfolio against market volatility.
B. Rupee cost averaging
Buy more when the price is low and less when the price is high. When you are investing via SIPs, you are investing a fixed amount on a specified date. If, on that date, the stock price is high, you will have a lesser number of shares and vice-versa. This ensures that you invest more at lower prices and less at higher prices, and hence your overall cost of acquisition gets averaged out.
C. Magic of compounding
It’s all about time in the market, not timing the market—the key to becoming wealthy is to start investing early and continue investing and stay invested. When you stay invested, you start earning returns on the new amounts you invest and the returns you have already made. This is called compounding, and it works like magic to help you build wealth.
SIPs are not automatically executed.
We will send you an email and WhatsApp & push notification to pay your SIP installment on every due date. No hassle of extra clicks for starting a SIP. It’s all in one place, making the process simpler & faster.
You have the flexibility to choose the SIP amount. So, if you initially want to start with small SIP amounts in your invested smallcase, you can do so. Then, once you get more comfortable, you can increase the SIP amount.
4. How to start SIP with Smallcase?
Check the SIP box while buying the smallcase (or)
Click on the Investments tab, click on the smallcase you want to set up SIP for and select start SIP from more Actions from the Investments tab.
In the SIP overview pop-up, you will have to select a frequency and start date for your SIP.
The frequency of investing in SIP can be weekly, fortnightly, monthly, or quarterly.
The amount for investing through SIP would be Rs. 5000 or greater, depending on the smallcase. You can also increase the amount you wish to invest.
Next, you will have to choose a start date for your SIP. Your SIP installment due date will be calculated from this date, depending on the frequency you have chosen.
The historical performance shows you an overview of what your investment would have amounted to at present if you had invested the said amount through SIP for the past three years.
After going over the things mentioned above, you can then click on the Save SIP button.
Upon clicking ‘Start SIP,’ you will be asked to confirm this action and informed that SIP acts as a reminder and does not automatically place orders on your behalf.
After confirming investing through SIP, you can click on ‘Continue’ to complete the process (or) if you want to make any changes to the frequency or start date, you can click on Edit SIP (You are free to edit your SIP at any time)
Alternatively, if you click edit, follow the steps below.
At the bottom of the Edit SIP window (below the performance chart), you have the option to ‘End SIP,’ which ceases your SIP installments for that smallcase (You are free to end your SIP at any time).
5. Understanding the SIP algorithm with an example
The above table shows the composition on the day of investment and your 1st SIP installment. The change in weights is due to the change in stock prices over time.
To simplify, let’s consider an equal-weighted basket. The logic would work the same way for custom weights too.
Initial Investment amount: 1,00,000
Monthly SIP instalment amount: 20,000
1. Calculate the number of shares based on the Total amount (Current value + SIP amount). On the day your SIP is due, the current value of your investment is 1,12,000. We calculate the total amount as (Current Value + SIP amount) = 1,32,000.
As per the above amount and the weights on T0, the number of shares to be bought will be calculated.
2. Calculate additional shares to be bought.
We then calculate the difference from existing holdings to form your SIP installment.
3. Determine the SIP amount.
The stocks that have deviated below from the ideal composition are preferred. The actual installment amount is calculated as New no. of shares * Market price of each stock.
4. In the next SIP installment, the same steps are repeated
Editing SIP configuration
Click on ‘Investments’
Click on your invested smallcase
Click on ‘Edit SIP’
Set the Frequency, SIP amount, and SIP date as desired
Click on ‘Save SIP Settings’
So, is regular SIP good or timing SIP at drawdown better??
Timing is better but difficult. Hence, for relatively new investors, it is better to start with regular SIP, get into the habit of investing and then look at the timing SIP bit later.