Systematic Investment Plan (SIP) - Things You Should Know

Priyanka Sharma

05 May 2017

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.

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mutual-fund

Why to Choose Mutual Funds Instead of Directly Investing Into Equities?

Whether to invest in equities or mutual funds is a question that has plagued every investor. As someone who needs the best value for his/her investment should you invest in equity directly or via mutual funds?

Let’s start by first understanding what these two terms ‘equities’ and ‘mutual funds’ stand for-

Equities- Equities generally represent ownership of a company. If you own any equity in a company, you are a part owner of the said company (depending on how much equity you own).

Mutual Funds – It is an investment scheme which is professionally managed by an asset management company. It pools together the resources of a group of people and invests their money in equities, debentures, bonds and other securities.

Why choose mutual funds over equities?

For people who’ve never invested in either stocks or mutual funds, it is hard to know which is better and where to start. Broadly speaking, if you are a novice investor, mutual funds are not only less risky but also way easier to manage. Here are some ways in which investing in mutual funds is beneficial as opposed to investing in equities -

Diversification

Mutual funds provide more diversification as compared to an individual equity stock. When you invest in equity, you are investing in a single company which has its inherent risk. For example, if you invest Rs.20,000 in buying equities of one company, you could face a total loss if that particular company performs poorly in the market.  

If you invest the same amount in mutual funds, it will be invested in different kinds of stocks and financial instruments, high-risk and low-risk both, so you might not face total loss even if one company does poorly.

Scale of Investment and Lower Costs

For an individual investor buying and selling stocks is a difficult task due to its high price. Thus, any gains made from stock appreciation are nullified if the overall trading costs are considered. Comparatively with mutual funds, as the money is pooled from a large number of investors, the cost per individual is lowered.  

Another advantage of mutual funds is that you don’t need to invest large sums of money. Buying equities for a profitable venture needs huge amounts of money, a minimum of few lakhs. With mutual funds, you can start with Rs.1000 and earn profits on that as well.

Convenience

Keeping an eye on the markets everyday is a time-consuming business, especially if you are investing as a side gig. There are people who spend their lives studying the market and still end up sustaining heavy losses. Though investing in mutual funds does not guarantee high returns, it is stress-free and needs less work as compared to investing in equities.

To sum it up

It is important to remember that mutual funds have their own disadvantages as well. Thus, as with any financial decision, educating yourself and understanding the suitability of all the available options is the ideal way to invest. 


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Systematic Investment Plan (SIP) - Things You Should Know

Priyanka Sharma

05 May 2017

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.

Have Referral Code?