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.}
|
Date
|
NAV
|
Approx number of units
you will get at Rs. 1000
|
|
Jan 1
|
10
|
100
|
|
Feb 1
|
10.5
|
95.23
|
|
Mar 1
|
11
|
90.90
|
|
Apr 1
|
9.5
|
105.26
|
|
May 1
|
9
|
111.11
|
|
Jun 1
|
11.5
|
86.95
|
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.
