Systematic Investment Plan (SIP) - Things You Should Know
05 May 2017
Priyanka Sharma
New Page 1
The Systematic Investment Plan (SIP) is an investment plan where you
deposit a fixed amount on a weekly/monthly or yearly basis. It is a systematic way of
investing in mutual funds. It is similar to your recurring deposit but here the amount is
invested rather than kept aside to get interested.
How does it work?
SIP is a way of investing in mutual funds even with a tight budget.
Here you could invest as less as Rs. 500 every month for 10 months rather than Rs. 5000 in
one go. This encourages your saving habit and doesn't affect your other financial
liabilities. Your money is debited from your account and invested in mutual funds. You are
allocated a certain number of units based on the Net Asset Value (NAV). NAV is the ongoing
market rate of the day. Each time you invest, more units are purchased at that day's NAV.
These mutual funds handled by experts.
How can you benefit from the SIP?
Investors can benefit in a number of ways from investing in SIPs. Here
are a few of the many benefits that it offers:
Rupee-Cost Averaging
This saves you the stress of timing the market. In rupee-cost
averaging, your money buys more units when the market is favorable and less when it is
not. This helps you get lower per unit average. Let’s understand this with an
example.
Month
|
NAV (Rs)
|
Monthly
Investment
made in SIP (Rs)
|
No. of
Units
|
Average
Cost Per
Unit
|
One Time Investment
made in a plain Mutual Fund (Rs)
|
No. of
Units
|
Average
Cost Per Unit
|
1st
|
15
|
2000
|
65
|
12.39 Rs/Unit
|
12000
|
400
|
15 Rs/Unit
|
2nd
|
12
|
2000
|
83
|
|
|
3rd
|
10
|
2000
|
100
|
|
|
4th
|
12
|
2000
|
83
|
|
|
5th
|
15
|
2000
|
67
|
|
|
6th
|
12
|
2000
|
80
|
|
|
Total
|
|
12000
|
478
|
|
|
As you may observe, with the systematic monthly investment the average
cost per unit was Rs. 2.61 lower than that with a one-time investment. This is due to
consistent investing habits that would reduce the loss and average the market fluctuations
better.
Effect of Compounding
Compounding involves making interest from the interest earned. This
means adding the interest that you earned to your principal amount and increasing your
base capital. Thereby, earning more interest. As time goes by, the amount you earn is also
increased significantly. Let us see this with an example.
|
SIP Investment Input (Rs)
|
SIP Investment Tenure
|
Rate of Interest
|
Returns (at the end of the tenure) (Rs)
|
Total Output (Rs)
|
Simple Interest
|
1000
|
5 years
|
10%
|
500
|
1500
|
Compound Interest
|
1000
|
5 years
|
10%
|
610
|
1610
|
The table shows the same amount of Rs. 1000 being invested for 5 years
at 10% interest. Yet where simple interest earns you an output of Rs. 1500, compound
interest earns you a 7% increase in the same. This can increase by more than twice
depending on the tenure of your investment.
Disciplined Savings
SIPs require disciplined saving approach. You need to be consistent in
your investments during the entire term to get the benefits. Starting to invest at an
early stage helps you earn more profits.
Flexibility and Convenience
It cannot be emphasized enough, the benefits of investing long-term in
SIPs. However, you are free to enter and exit from an SIP at any time. It is also
convenient to manage. You can give standing instructions to your bank to auto-debit funds
towards your SIP.
To conclude
SIPs are great investment options even when you are on a tight budget.
Start investing early to gain greater returns. You need to invest for a long term to reap
the benefits of the effect of compounding. Ensure you don’t miss your payments to
appreciate the working of SIPs in your favor.