How can stock SIPs benefit early investors with long-term financial goals?
Upstox
3 min read • Updated: February 24, 2024, 4:08 PM
Summary
For many young investors, having just begun their financial journey, achieving long-term goals may seem like a distant reality, and at times a daunting one. Conversations with peers and reading investment blogs may make high-risk high-reward investments seem more attractive. However, maintaining a long-term and sustainable outlook on investments will prove to be more effective and safer. Stock SIPs possess the ability to capitalise on the power of compounding. Getting an early start on SIP investments allows young investors an opportunity for exponential growth over the long run. Moreover, even a modest monthly contribution can potentially result in substantial long-term gains. The trick is to start as early as possible, ensuring your capital is consistently ‘rolled’.
What are stock SIPs?
SIP stands for Systematic Investment Plan. This is an investment setup that allows individuals to invest fixed amounts of capital in the stock markets at regular intervals. These intervals could be measured in monthly or quarterly payments made towards the investment.
Here, the capital invested is utilised to purchase stocks in a variety of listed companies. SIPs are long-term investment instruments that leverage compounding to yield favourable returns over an extended period of time.
Assume an investor, age 25, initiates a ₹1,000 monthly systematic investment plan (SIP) in a diversified index fund. By the time they retire at age 60, their capital would have appreciated to approximately ₹65.8 lakh, assuming an average yearly return of 10% compounded annually. This illustrates the power of compounding, which allows even small early payments to grow into significant sums over decades.
Reliance Industries, Tata Consultancy Services, and Hindustan Lever are a few popular SIP stocks, just to name a few.
How does it benefit early investors?
SIPs, in general, allow a longer investment horizon and a wider window of opportunity for wealth generation.
Rupee-cost averaging
Stock markets are inherently volatile and can intimidate young investors. SIPs, however, allay market risks through rupee cost averaging. This means that, by investing a fixed amount of money at periodic intervals, irrespective of fluctuation, investors are typically procuring fewer shares when prices are high, while the quantity increases when prices are low. As a result, the cost per share is averaged out over a period of time while reducing the impact of market volatility.
Diversification
Stock SIPs offer young investors a lot of flexibility, with respect to tailoring their portfolios in alignment with investment goals and individual risk profiles. Selecting stocks from diverse sectors and industries can help disperse their risk and reduce the impact of negative company-specific performance. Simply put, diversification is a hedge that protects investors from a single underperforming stock from derailing their entire investment plan.
Long-term benefits
SIPs can help investors potentially beat inflation over the long term. Compared to conventional investment options like term deposits, returns of which are affected by inflation, SIPs have been known to yield a higher rate of return, countering the financial impasse caused by inflation.
Conclusion
Investing in stock SIPs can tremendously benefit investors young and old. With time on their side, budding investors can plan for financial security and effective wealth generation by funding their SIP investments consistently and in a disciplined manner.