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Systematic Investment Plan
Systematic Investment Plan or SIP is a disciplined way of investing one's money
in order to take advantage of the volatility in the market, and thus drawing maximum
benefit out of our investments over a longer period of time. The plan aims at a
better future for its investors.
How it Works?
I t works on the principle of Rupee Cost Averaging (‘RCA’) by which one puts in a
certain sum of money every month in a mutual fund regularly, the prevailing NAV
of the fund determines the number of units that will be allocated to you. Thus,
it reduces the market timing problem. To illustrate this lets compare investing
the identical amounts through a SIP and in one lump sum.
Concept of Rupee Cost Averaging
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Imagine Karan invests Rs.1000 every month in an equity
mutual fund scheme, starting in January. His friend, Arjun, invests Rs. 12000 in
one lump sum in the same scheme. The following tables illustrate how their
respective investments would have performed from Jan to Dec:
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Tarun's Investment
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Kumar's Investment |
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Month
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NAV
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Amount
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Units
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Amount
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Units
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Jan-01
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9.345
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1000
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107.0091
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12000
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1284.1091
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Feb-01
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9.399
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1000
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106.3943
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Mar-01
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8.123
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1000
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123.1072
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Apr-01
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8.750
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1000
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114.2857
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May-01
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8.012
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1000
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124.8128
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Jun-01
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8.925
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1000
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112.0448
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Jul-01
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9.102
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1000
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109.8660
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Aug-01
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8.310
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1000
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120.3369
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Sep-01
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7.568
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1000
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132.1353
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Oct-01
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6.462
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1000
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154.7509
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Nov-01
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6.931
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1000
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144.2793
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Dec-01
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7.600
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1000
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131.5789
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Total
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12000
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1480.6012
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12000
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1284.1091
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As seen in the table, by investing with a SIP, Karan ends up buying more units
when the price is low and fewer units when the price is high. However, over a
period of time these market fluctuations are generally averaged. And hence the
average cost of the investment is often reduced. |
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At the end of the 12 months, Karan has more units than Arjun, even though they
invested the same amount. That's because the average cost of Karan's units is
much lower than that of Arjun. Arjun made only one investment and that too when
the per-unit price was high. Karan's average unit price = 12000/1480.6012 = Rs.
8.105 Arjun's average unit price = Rs. 9.345.
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How to start an SIP?
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When you get your salary cheque, you promise yourself you will start saving by
putting aside a little sum every month. But, all you do is make the same promise
month after month, and you just end up making the promise every month, but no
saving really happens. |
Assuming that you have an appetite for a little risk, the best way to keep the
promise is to start a systematic investment plan with a mutual fund scheme
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- Pick any date of a month, and then fill out an SIP form and
an application form.
- Draw post-dated monthly adding up to at least minimum investment of scheme or
you can choose ECS Scheme.
- Monthly - Start with any dates of any month, and stick to the same date of every
month.
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If in any month the chosen date is not a Working Day, the transaction will be
completed on the next Working Day.
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