OMTEX CLASSES: Systematic Investment Plan

Systematic Investment Plan

   A Systematic Investment Plan (SIP) is a vehicle offered by mutual funds to help investors save regularly. It is just like a recurring deposit with the post office or bank where you put in a small amount every month, except the amount is invested in a mutual fund. The minimum amount to be invested can be as small as Rs. 100 (100 Indian Rupees) and the frequency of investment is usually monthly or quarterly.

How a SIP works

A SIP allows investment in the stock market without trying to second-guess its movements. It is also known as dollar cost averaging.
A SIP means the person commits to investing a fixed amount every month. Let's say it is Rs. 1,000. When the Market price of shares fall, the investor benefits by purchasing more units; and is protected by purchasing less when the price rises. Thus the average cost of units is always closer to the lower end.) { NAV : Net Asset Value, or the price of one unit of a fund. Can be computed as follows : NAV = [ market value of all the investments in the fund + current assets + deposits - liabilities ] divided by the number of units outstanding.}
Approx number of units you will get at Rs. 1000
Jan 1
Feb 1
Mar 1
Apr 1
May 1
Jun 1

Within six months, this is a value of 5,89.45 units by investing just
 Rs. 1,000 every month.
Over the long run, money can either be gained or lost.
Let's say an investment in a Mutual Fund unit during the dotcom and tech boom.
Say it began with Rs. 1,000 and kept investing Rs. 1,000 every month. This would be the result:
Investment period
·        Mar 2000 to  Mar 2005
Monthly investment
·        Rs. 1,000
Total amount invested
·        Rs. 61,000
Value of investment of Mar 7, 2005
·        Rs. 1,09,315
Return on investment
·        23.87%

Had the units been bought on March 13, 2000 at
 Rs. 10.88 per unit (the NAV then), the result would be a loss because the NAV was just 7.04 on March 7, 2005. But because of spacing out the investment, it is a gain.
Conversely if the market had trended higher from the day investing started, the result would be loss of an opportunity. This would happen as subsequent purchases will get a smaller number of units for the same amount.
Systematic Investment Plan can help people to be disciplined but not solve market timing issues. Further, the Investment advisors or the Mutual Fund may have a vested interest in pitching this idea to consumers as a method of future investment would also accrue effortlessly.