Stock SIP: Definition, Choosing Stocks, Importance, and Risk Management

Stock SIPs are investments that are executed on a regular basis, such as daily, weekly, or monthly, depending on your preference. Stock SIPs are scheduled, which helps you maintain a sense of discipline and improve your financial planning.

SIP in stocks necessitates discipline and patience. Investors may profit from the compounding effect and generate greater returns over the long term by consistently investing. It also alleviates the risk associated with investing a substantial sum of money at once by distributing the investment over a longer period.

Companies that possess a competitive advantage, a robust business model, and a track record of consistent growth should be prioritized. Investing in stocks of various companies from various sectors is also crucial for diversifying the portfolio.

What is a Stock SIP?

A stock SIP refers to the practice of investing a fixed amount of money at regular intervals in individual stocks or a basket of stocks. In a stock SIP, the investor must select and manage the stocks themselves or seek the assistance of a stockbroker or investment advisor. This is unlike mutual funds SIPs, where the investment is managed by a professional fund manager, 

How to start SIP in Stocks?

Stock SIP is done through a trading account like Zerodha Kite, Upstox, Groww etc. Below are the steps to follow once you have chosen a trading account.

Choose a Stock

Decide which stock or stocks you want to accumulate over time. It’s advisable to select companies with strong fundamentals, good growth prospects, and a track record of consistent performance.

Determine Investment Amount and Frequency

Decide how much you want to invest and at what intervals – monthly, quarterly, or any other frequency that suits your financial situation.

Set up a Stock SIP

Log into your stockbroker’s online trading platform or mobile app and look for the “Stock SIP” or “Invest Regularly” option. Select the stock(s), enter the quantity or amount you wish to invest, the frequency, and the duration for which you want to run the SIP.

Provide Funding

Link your bank account to your trading account and authorize the stockbroker to debit the specified amount at the chosen frequency for the Stock SIP.

Keep track of your Stock SIP investments and the performance of the stocks you’ve chosen. You can pause, modify, or stop the SIP at any time based on your investment objectives or changing market conditions.

What are the Best Stocks for SIP?

Below is a list of the best stocks for SIP based on their performance, market cap and industry.

Why should you invest through Stock SIP?

You should invest through a stock SIP because they allow buying more stock units through periodic investments rather than lumpsums so you get benefits of averaging the purchase price over market fluctuations. The fixed, disciplined nature of SIPs aid long term wealth creation by providing investor consistency through ups and downs.

SIPs build the investing habit through automated transfers, letting funds get invested without dependence on short-term money availability. The returns get reinvested to provide compounded growth through the power of compounding over extended periods instead of spending returns.

Who should invest in Stock SIP?

Below are 7 types of investors who should consider investing in Stock SIPs.

• Young investors: Stock SIPs are ideal to start investing early and harness long tenure to create substantial corpus
• Salaried individuals: The fixed, regular nature of salaries allows setting up automated SIP deductions convenient
• Long term wealth builders: SIPs enable wealth accumulation over extended 15-20 year periods through compounding  
• First time investors: The small periodic investment sizes allow those new to stocks to get acclimatized slowly
• Goal planners: Stock SIPs can be used to accumulate predictable future amounts for specific purposes
• Passive investors: For those looking to benefit from long term equity growth sans much time commitment  
• Risk mitigation seekers: SIPs aid price averaging which reduces risk compared to lump sum purchases

The key is that Stock SIPs allow regular investing in the stock market for wealth building despite fluctuating asset prices. This method is ideal for retail investors without trading skills or significant risk appetites, enabling them to engage with the stock market over shorter durations without the need for large upfront investments.

What are the Tax Implications for Stock SIP?

The tax treatment for gains from Stock SIP depends on the holding period of the stocks. Gains from stocks held for over 1 year are considered long-term capital gains and are taxed at 10% above Rs 1 lakh per year. Short-term capital gains tax of 15% applies if stocks are sold within 1 year.

Tax is calculated on net gains after deducting costs like brokerage fees. Dividend income from stocks is tax-free in the hands of the investor. Losses from stocks can be offset against capital gains. 

How to manage risks for Stock SIP?

The key to managing risks in a Stock SIP is diversification. Invest across multiple stocks and sectors to mitigate company or sector-specific risks. Avoid investing large amounts in a single stock. Moderate your return expectations – equity investments are subject to market volatility. Invest only surplus funds which you can remain invested for long term.

Do not overexpose yourself to equities. Balance your portfolio with other assets like debt and gold for effective risk management. Keep emergency funds separate and practice risk management by reviewing and rebalancing your SIP portfolio periodically. Do not make impulsive investment decisions based on market swings. Adhere to investment discipline and stay invested for the long term to benefit from rupee cost averaging. Consult a financial advisor if needed.

Is Stock SIP better than Mutual Fund SIP?

Yes, stock SIPs provide opportunity for potentially higher returns compared to Mutual Fund SIPs owing to direct ownership of shares, however they also come with higher risks due to volatility associated with individual stocks. For investors with moderately high risk tolerance and an investment horizon of 8-10 years or more, direct stock SIPs can provide higher corpus accumulation.

However, for conservative investors focused on capital protection and with ability to remain invested for only 5-7 years, Mutual Fund SIPs would be more appropriate given their diversified portfolio and lower risk attributes.

Arjun Remesh

Head of Content

Arjun is a seasoned stock market content expert with over 7 years of experience in stock market, technical & fundamental analysis. Since 2020, he has been a key contributor to Strike platform. Arjun is an active stock market investor with his in-depth stock market analysis knowledge. Arjun is also an certified stock market researcher from Indiacharts, mentored by Rohit Srivastava.

Shivam Gaba

Reviewer of Content

Shivam is a stock market content expert with CFTe certification. He is been trading from last 8 years in indian stock market. He has a vast knowledge in technical analysis, financial market education, product management, risk assessment, derivatives trading & market Research. He won Zerodha 60-Day Challenge thrice in a row. He is being mentored by Rohit Srivastava, Indiacharts.