Systematic Investment Plan
 
What is SIP -- An Effective Way Of Wealth Optimization
 

It is always said, "Money saved is money earned”. And what better way to save than investing in an SIP.

SIP works on the principle of regular investments. It is like your recurring deposit where you put in a small amount every month. It allows you to invest in a MF by making smaller periodic investments (monthly or quarterly) in place of a heavy one-time investment i.e. SIP allows you to pay 10 periodic investments of Rs 500 each in place of a one-time investment of Rs 5,000 in an MF. Thus, you can invest in an MF without altering your other financial liabilities. It is imperative to understand the concept of rupee cost averaging and the power of compounding to better appreciate the working of SIPs.
 
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.
 
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.
 
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

 
 
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.
 
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
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
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.
 
For more information or any other assistance, please contact us. We will be happy to help you.