Investing in equities SIP by SIP

Chaiwallah of Dalal Street 

answers 5 questions about SIPs

Whenever a financial planner or a stock broker talks to an investor about putting in some money in the stock market, they generally end up saying "Sir, aap SIP kyun nahi kar lete?"

There is quite a lot of confusion about what this SIP is - is it beneficial and if I put my hard earned money in this, how should I go about it?

So here are 5 questions you wanted to ask about SIPs but didn't know who to ask?

What is SIP?

SIP is short for Systematic Investment Plan. To simplify it, you can consider it to be the opposite of an EMI; With an EMI you pay a certain amount of money every month to clear your loan, while with an SIP you pay a certain amount of money to buy some mutual fund units.

What is mutual fund then?

Remember as a kid when we used to play galli cricket, we'd all chip in some rupees and buy a few balls so that we could all play and not worry if 1-2 balls got lost.

Keep this in mind and tweak the idea slightly. 

Now, we all give some of our money to the  fund manager, who then buys the shares of the companies that he thinks will give the best return to us. So by paying smaller amounts, we have access to a large number of shares (just like by paying a few rupees we had access to a larger supply of balls).

So we can invest in SIPs to invest in Mutual Funds?

In a way yes, but that's not the correct way to say it. SIPs are a vehicle to invest in Mutual Funds. 

With things being so expensive nowadays it is difficult for most people to save or invest large sums of money every month. So what you can do is to fix a certain amount per month (starting from as low at Rs. 500) that you will invest in Mutual funds. When you give the order to your bank to release a fixed amount per month (just like EMI) towards a mutual fund, this is called a SIP. 

But I think stock market is just a gamble; it's very risky.

Hmm, ok, I can see why you would think that. But SIPs can be made for mutual funds that invest in debt instruments (like bonds and deposits) - which are much less volatile compared to equities. Also, there are Balanced Mutual Funds (which invest in equities and bonds/deposits) as well as Gold Mutual Funds. So you can use SIPs to invest in these funds as well.

Why is everyone promoting SIPs? Is it really that important to an investor's financial portfolio?

SIPs allow the investor to invest small amounts every month. This helps the investor be disciplined in his investing and also helps him reap the benefits of the same. 

The values of shares in the stock market are constantly changing. By regularly investing, the investor averages out the good & bad days on the stock market rather than investing and hoping/praying that the market goes up only. 

So yes, SIPs are very beneficial to an investor's portfolio.

SIPs can now be started online, so it is almost hassle free. Here's a link to an article about starting an SIP online.

Any more queries about SIP? Write to me in the comments section and I'll try and solve them to the best of my ability.

You can also visit this link for a very helpful investor education initiative called SIP Day undertaken by Kotak Mutual Fund & ET Now.

Most importantly:

We spend most of our day working hard to earn money - so please take a few hours a month to learn about how to best invest that money.

It might be tough and confusing in the beginning, but so was your first job, and look how far you've come in that.

So please read up about SIPs, Mutual Funds and investing and talk to your financial advisor before you invest your hard earned money.