You can make money in stock market with a simple SIP strategy (with proof)

-Krishna Khatiwada

Every successful investor has said that the margin of safety is one of the important ingredient for successful trading. Many investors who fail to maintain this are on the losing side of investment. Systematic Investment Plan (SIP) will help you manage your risk with ease.

SIP is simply a recurring investment of fixed amount of money within a fixed period of time; period of time could be 15 days, 1 month, 3 months, 1 year etc.

Consider this example: Ram decided to invest Rs 5,000 per month on ABC stock. So, if on 1^st January,  price of ABC Company is Rs 250 then he will buy 20 stocks and on the 1^st February if the price stands at Rs 200 then he will buy 25 stocks.

We did an in-depth research on SIP on NEPSE index, the details are below:  

We assumed we have been investing Rs 20,000 per month in NEPSE from March 2011. As you can see in the table, on March 2011, we own 53.05 units of share when NEPSE index was at 377 points and on April 2011, our total stock became 107.84. That means we bought another 54.79 units of stock on April with Rs 20,000.

Above table shows the total number of stocks at any particular period of time with market value of NEPSE index at that time. On our SIP system, we have invested regularly from March 2011 to December 2015, and then we kept our investment for next 3.5 years without further investment. Rule of SIP is to keep the investment for at least 40% of the total investment time without further investment.

So, at the end of December 2015, we own a total of 2179.46 units of share with our total investment of Rs 11.60 lakh. Our market capitalization currently stands at Rs 27.63 lakh. So, in the period of 7.25 years, we have gained 138.24% with 12.70% CAGR. The most amazing part of SIP in stock market is that you will get annualized return of 12.70% for full 7 years on your last invested Rs 20,000 which had been invested for only 3.5 years.

What are the benefits of SIP?

1. Less emotional stress: Behavior of a typical investor is that they will panic when price falls and get over-energetic when it goes up. SIP keeps you away from emotional pressure as you will be less concerned with the price fluctuation. You just buy stocks according to your fixed investment plan irrespective of current market price.
2. Risk Management: Market always fluctuates, and it has neither gone straight up nor it had gone straight down. So, in SIP, when price reaches high you will own fewer stocks and when price remains low, you will own more stocks. For example, if you buy stock at Rs 1000 on first month, you will own 5 stock with five thousands, and if on another month price went down to Rs 200, then You will lose Rs 800. But if you are investing in SIP you are bringing your average cost down. In SIP, you will buy 25 stocks with same five thousand next month which will bring your average cost to Rs 400 that means if price gets doubled, you can recover all your losses whereas in first case, price has to recover 400% to recover loss. In short, with SIP you will own more stock when price goes low which brings your average cost down, hence managing your risk.
3. Huge capital is not required at the beginning: SIP gives an opportunity to invest even in the smallest amount, we can invest 1000 per month or 5000 per year and yet we can get return to cumulative investment amount. Other financial instruments never give you 12.70% returns on SIP.  In other instruments, you will get the return based on the time period of investment. For example, if you decided to SIP of Rs 1 lakh per year for next three years, then your return on 1^st  investment will be given for the next three years, and on your next Rs 1 lakh, that will be given for next two years, which brings average return down, from the said return.

If you can devote more time in the market, if you understand the character and forces that drives the market then the profit can be huge in SIP.  Further, in SIP, there are different strategies. Some investors choose to buy more when price gets low, some hold on buying when the price goes abruptly high etc.

Even if you are fulltime employed and don’t have much time to check market regularly, then you can invest in SIP by choosing healthy stocks rather than keeping it in the fixed deposit or in any other instruments. You can start with very small amount; you can invest for child education, retirement plan or any other longer term plan. In SIP, longer term investment gets more return that is due to the magic of CAGR. For example, if you invest Rs 10 thousand per month in SIP for next 15 years, then on the 16^th year your profit will be 13.74 lakhs, on 17^th year 15.48 lakhs, on the 18^th year profit will be Rs 17.45 lakh, on 19^th year Rs 19.67 lakhs and on 20^th year Rs 22.15 lakhs as per 12.70% CAGR, increment of profit will be higher than the previous years. If you are 30 right now, then at the time of retirement you will be earning a very handsome return of around Rs 73 lakhs per annum with same investment. The Rs 10,000 investment per month can build a huge empire. One way or other, a person has to save money, then why not invest in the stock market?

The historical average of fixed deposit return is around 7-8%, the rate fluctuates as per the liquidity. Fixed deposit will be for fixed period of time and if you need money before term-period, you will be paid less. Historical average of SIP in accordance with above mentioned plan is around 12%.

Bearish market is one of the great times to start SIP. Bull and Bear is a common feature of market.

The beauty of stock market is that it does not have maturity period and your investment is liquid: you can sell your stock at any point of time as well as you can keep your money in stock market for life time and can enjoy the returns.