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| What is Systematic
Investment Plan |
| Systematic Investment
Plan (SIP) is a disciplined way of investing, where you invest
fixed amounts at a regular frequency. You often decide to start
saving and investing regularly, but get caught up in your day
to day activities and forget investments. SIP, the time-tested
investment approach helps bring in the much-needed discipline,
and has shown good results the world-wide. |
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| Advantages
of SIP |
An
SIP helps you reach your financial goals by investing a fixed
sum monthly / quarterly, in your chosen fund, for a pre-determined
number of periods. So that you -
- Average out on market fluctuations (no need to time
the market).
- Get investment discipline, helping you invest for and
reach your future goals.
- Invest disposable funds – that might otherwise
lie in Savings accounts, earning low interest and letting
inflation eat into them.
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| How
to start an SIP |
- Pick any date of a month, then fill out an SIP form
and an application form.
- Draw post-dated monthly / quarterly cheques , adding
up to at least minimum investment of scheme.
- Monthly - Start with any dates of any month, and stick
to the same date of every month.
- Quarterly - Start on of any month, and stick to the
same date of every third month.
- 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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| Illustration |
Month |
Amount
Invested (Rs.) |
Rising
Market |
|
Falling
Market |
|
Volatile
Market |
| |
|
NAV |
Units
Alloted |
NAV |
Units
Alloted |
NAV |
Units
Alloted |
1 |
1,000 |
10 |
100.00 |
10 |
100.00 |
10 |
100.00 |
2 |
1,000 |
12 |
83.33 |
8 |
125.00 |
12 |
83.33 |
3 |
1,000 |
14 |
71.43 |
6 |
166.67 |
8> |
125.00 |
4 |
1,000 |
16 |
62.50 |
4 |
250.00 |
10 |
100.00 |
Total |
4,000 |
52 |
317.26 |
28 |
641.67 |
40 |
408.33 |
Average Purchase NAV
(Sum Total of NAV's/Total Number of investments made) |
13.00 |
|
7.00 |
|
10.00 |
|
Average costs per unit
(Sum Total of Investment/ Sum Total Units Alloted) |
12.61 |
|
6.23 |
|
9.80 |
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Thus we
see that the average unit cost under Systematic Investment
Plan will always be less than the average purchase price per
unit irrespective of the market rising, falling or fluctuating. |
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| Difference of SIP in Fluctuating
Market and Rising Market |
| Let us suppose that you would
like to invest Rs. 1,000 every month, in an equity fund using
the SIP. The following table shows how your investments would
look in the two scenarios of fluctuating and rising market |
Month |
Amount
Invested (Rs.) |
Fluctuating
Market |
Rising
Market |
Purchase
Price
(Rs.) |
No.
of Units
Purchased |
Purchase
Price
(Rs.) |
No.
of Units
Purchased |
Purchase
Price
(Rs.) |
Initial Investment |
1,000 |
10.00 |
100.00 |
10.00 |
100.00 |
1 |
1,000 |
8.20 |
121.95 |
10.50 |
95.24 |
2 |
1,000 |
7.40 |
135.14 |
11.00 |
90.91 |
3 |
1,000 |
6.10 |
163.93 |
11.50 |
86.96 |
4 |
1,000 |
5.40 |
185.19 |
12.00 |
83.33 |
5 |
1,000 |
6.00 |
166.67 |
12.40 |
80.65 |
6 |
1,000 |
8.20 |
121.95 |
12.90 |
77.52 |
7 |
1,000 |
9.25 |
108.11 |
13.35 |
74.91 |
8 |
1,000 |
10.00 |
100.00 |
14.00 |
71.43 |
9 |
1,000 |
11.25 |
88.89 |
14.50 |
68.97 |
10 |
1,000 |
13.40 |
74.63 |
15.00 |
66.67 |
11 |
1,000 |
14.40 |
69.44 |
15.50 |
64.52 |
TOTAL |
12,000 |
|
1,435.90 |
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961.11 |
| Average
Unit Cost |
(Rs. 12,000/1435.9) =
Rs. 8.36 |
(Rs. 12,000/961.1) =
Rs. 12.49 |
| Average
Unit Price |
(Sum of Purchase price / 12) = Rs.
9.13 |
(Sum of Purchase price / 12) = Rs.
12.72 |
| Assumed
NAV @ Q12 |
Rs. 14.90 |
Rs. 16.00 |
| Market Value |
(1435.9 units x Rs. 14.90) = Rs. 21,395 |
(961.11 units x Rs. 16.00) = Rs. 15,378 |
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| Therefore,
the average unit cost is lower than average unit price irrespective
of market rising or fluctuating. This happens because you
get the advantage of buying more units when the market is
low and averaging out the purchase price. |
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