If you are not well-versed with stock market investing, you may be wary of the high risks. It is also possible that you may know the stocks you want to buy but are unsure about the quantity. The inherent risk of adverse price movements is prevalent in the stock market. You may be wondering how to protect yourself against such risks.
One way to do this is to invest in equity mutual funds. However, mutual funds attract fund management charges. Over a long period, these charges may be a huge amount.
All the aforementioned challenges may be overcome through systematic investment plans (SIPs) in direct equities. Several brokers offer such services where you may invest through exchange-traded funds (ETFs) or specified shares. You may choose a fixed amount or quantity based on your personal preference. The brokerage service provider buys on your behalf on a regular basis, which may be monthly or quarterly.
Here are four benefits of systematic investment plans.
- Cost averaging
One of the biggest advantages of investing in SIPs is cost averaging. Your purchase cost is averaged over multiple transactions. As a result, you are protected against price movements and do not have to worry about timing the market right. You will be able to buy a larger quantity when the price is low and vice versa.
- Risk diversification
When you invest in a single stock, there is an inherent risk. However, a systematic investment plan allows you to invest in different sectors. This helps you diversify your risk. Dematerialization allows you to invest even in a single share. Therefore, you are able to easily start a systematic plan that includes multiple stocks from various sectors. You may choose stocks based on your asset allocation and cash flows.
- No hidden costs
When you invest in equities, there is complete transparency about the various charges. Stock market transactions include securities transaction tax, demat account charges, and brokerage. All these costs are known and, therefore, investing in stocks has no hidden charges.
- Disciplined investing
When you opt for a systematic investment plan, you are able to follow a disciplined approach to investing. You invest a fixed amount at regular intervals to ensure you are able to build wealth.
When you start SIP investments, it is recommended you choose a few frontline stocks. One way to achieve this is to include stocks from the Bombay Stock Exchange (BSE) Sensex or Nifty. Investing in companies with several years of track record helps reduce your risk. Furthermore, you must remain invested for a longer period of time. It is recommended you stay invested for at least three to four years to maximize your returns.
Stock market investing is not simple. However, a systematic investment plan is the best and easiest way to invest in shares and maximize your returns.