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Chapter 3 Systematic Investment Plan

What is Systematic Investment Plan (SIP)?

A Systematic Investment Plan (SIP) is way to invest a specific amount in mutual funds schemes regularly, generally monthly or quarterly. Investors can start SIP in a mutual fund scheme with a sum as small as Rs. 500 per month. There is no maximum cap in SIP amount until specified by the scheme. Generally, mutual funds offer the following SIP dates – 1st, 7th, 10th, 15th, 20th and 21st of every month. Investors can select any date from these SIP dates.

In the long run, regular and disciplined investing via SIP can average out the rise and fall in the markets. This is known as rupee cost averaging.

SIP Allows You to Invest Even Small Sums

One can start SIP with a sum as small as Rs. 500. Most of the equity funds have a monthly or quarterly SIP option. You can link your salary account to start an ECS and choose a date and frequency option, as per your convenience.

How to Start a SIP?

An investor can start a SIP on a pre-decided date, every month, using Electronic Clearing Service (ECS) or direct debit facility available with banks. Each month, money will be automatically transferred from the investor’s bank account to the Mutual Fund account.

How SIP Reduces Portfolio Volatility?

If one invests a lump sum amount in an equity fund and the market falls soon after, then the investor’s portfolio value falls below purchase price. Instead if the investor chose to invest an amount each month, the investor will be able to benefit from lower unit price of the fund when market falls. Thus, the SIP allows the investor to average over time and enjoy lower volatility in the value of investment as compared to the lump sum approach.

For example, as illustrated in below example if an investor started an SIP of Rs. 5,000 per month in an equity mutual fund scheme for a year. The investor made a profit of Rs. 17,090 despite decline in NAV for 5 consecutive months because the investor received more units when the NAV was falling. When the NAV retrieved the investment value surged. In addition, the average NAV was Rs 10.12 despite the fact that NAV for 6 months was above Rs 10.12, this phenomenon is called ‘Rupee Average Costing’.

Month SIP NAV Units Total Units Total Investment Investment Value
1 ₹ 5,000 ₹ 10 500 500 ₹ 5,000 ₹ 5,000
2 ₹ 5,000 ₹ 12 417 917 ₹ 10,000 ₹ 11,000
3 ₹ 5,000 ₹ 13 385 1301 ₹ 15,000 ₹ 16,917
4 ₹ 5,000 ₹ 11 455 1756 ₹ 20,000 ₹ 19,314
5 ₹ 5,000 ₹ 10 500 2256 ₹ 25,000 ₹ 22,558
6 ₹ 5,000 ₹ 9 556 2811 ₹ 30,000 ₹ 25,302
7 ₹ 5,000 ₹ 8 625 3436 ₹ 35,000 ₹ 27,491
8 ₹ 5,000 ₹ 7 714 4151 ₹ 40,000 ₹ 29,055
9 ₹ 5,000 ₹ 9 556 4706 ₹ 45,000 ₹ 42,356
10 ₹ 5,000 ₹ 11 455 5161 ₹ 50,000 ₹ 56,768
11 ₹ 5,000 ₹ 13 385 5545 ₹ 55,000 ₹ 72,090
12 ₹ 5,000 ₹ 13 385 5930 ₹ 60,000 ₹ 77,090

Key Takeaways

  • Systematic Investment Plan allows an investor to invest funds at regular intervals.

  • An investor can start a SIP on a pre-decided date, every month, using Electronic Clearing Service (ECS) or direct debit facility available with banks.

  • SIPs allow investing small amount like Rs 500 per month.

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