SIP vs. Demat Accounts: Key Differences You Need to Know

Radhika arora

Dec 17, 2024 - 18:55

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SIP vs. Demat Accounts: Key Differences You Need to Know

Several investors go through a demat account opening process every year and start investing in the Indian stock market. If you too are about to open a demat account, you should understand the difference between systematic investment plans (SIPs) and demat accounts.

Understanding both these terms is extremely important for you to become a successful investor over a period of time.

So, what is a systematic investment plan or SIP?

What Is an SIP and How Can It Help You?

When you do an SIP, you invest a fixed amount in a mutual fund (MF) at regular intervals, like once in a month or once in a quarter. Investing regularly has two huge benefits. First, it makes you disciplined about your investments.

Most people find it difficult to be disciplined when it comes to their investments, which is detrimental to their long-term financial goals. Second, it helps you average out the cost of investment. Let us understand it thoroughly. Whenever an investor thinks of investing in the stock market, he is typically worried because he does not know whether the prices are too high or not in the market.

However, if he buys once every month or once every quarter, he will be averaging out the price at which he will invest. In simple words, when you do an SIP, you do not have to worry about timing the market.

Besides, if you start doing SIP early in your life (when you are less than 30), it will help you create a huge investment corpus by the time you are 60 due to the power of compounding. Last but not least, when you do an SIP in an MF, you let a mutual fund manager invest your money who has expertise in the stock market.

Now, let us discuss why everyone needs a demat account.

Why Do You Need a Demat Account?

If you want to buy or sell shares in the Indian stock market, you have to open a demat account. This is because we can no longer trade in shares in their physical form as paper certificates.

The regulations in India require us to hold our shares in a demat or electronic format. For that, we need to open a demat account. With demat accounts, we can access all our stock market-related investments anytime and anywhere with the help of a laptop and an internet connection.

Besides, we do not need to keep paper certificates for shares. As a result, we do not have to worry about those certificates getting damaged or stolen.

How Is a Demat Account Different from an SIP?

A demat account is an electronic repository for all the stocks you own. When you access your demat account, you can see all your stocks-related investments on your laptop’s or smartphone’s screen.

On the other hand, SIPs are a way to make investments, typically in mutual funds. If you want to make a SIP in an MF, it is not compulsory to have a demat account because you can buy units in an MF through a bank, an asset management company (AMC), or a financial advisor.

However, you can also buy units in an MF through your demat account. Meanwhile, you can also make a SIP of stocks. In other words, you can invest in select stocks at regular intervals. For this kind of SIP, you will need a demat account because you are buying stocks in this case.

How do you select stocks for an SIP? For that, you can either take the help of an investment advisor or select the stocks yourself based on your risk appetite, investment horizon, and the objective of investment.

Conclusion

As a retail investor, leveraging a Demat account and a Systematic Investment Plan (SIP) can be game-changing for achieving your financial goals. A Demat account simplifies the process of buying and holding shares, mutual funds, and bonds, enabling you to manage your investments seamlessly in a digital format. It eliminates the hassle of physical certificates, ensuring secure and efficient storage of assets.

On the other hand, an SIP is an ideal tool for disciplined investing. By investing a fixed amount regularly in mutual funds, you benefit from rupee cost averaging and the power of compounding. This approach helps mitigate market volatility and steadily grows your wealth over time.

By combining the simplicity of a Demat account with the consistency of an SIP, you can create a diversified investment portfolio, stay financially secure, and move closer to achieving long-term financial independence.