A Systematic Investment Plan (SIP) is a vehicle offered by mutual funds to help you save regularly.
It is just like a recurring deposit with the post office or bank where you put in a small amount every month. The difference here is that the amount is invested in a mutual fund.
The minimum amount to be invested can be as small as Rs 100 and the frequency of investment is usually monthly or quarterly.
How an SIP works
An SIP allows you to take part in the stock market without trying to second-guess its movements.
An SIP means you commit yourself to investing a fixed amount every month. Let's say it is Rs 1,000.
When the NAV is high, you will get fewer units. When it drops, you will get more units. { NAV : Net Asset Value , or the price of one unit of a fund. Can be computed as follows : NAV = [ market value of all the investments in the fund + current assets + deposits - liabilities ] divided by the number of units outstanding.}
| Date | NAV | Approx number of units you will get at Rs. 1000 |
|---|---|---|
| Jan 1 | 10 | 100 |
| Feb 1 | 10.5 | 95.23 |
| Mar 1 | 11 | 90.90 |
| Apr 1 | 9.5 | 105.26 |
| May 1 | 9 | 111.11 |
| Jun 1 | 11.5 | 86.95 |
Within six months, you would have 5,89.45 units by investing just Rs 1,000 every month.
Over the long run, you make money
Let's say you invested in Prudential ICICI Technology Fund during the dotcom and tech boom.
Say you began with Rs 1,000 and kept investing Rs 1,000 every month. This would be the result:
Investment period
- Mar 2000 � Mar 2005
Monthly investment
- Rs 1,000
Total amount invested
- Rs 61,000
Value of investment of Mar 7, 2005
- Rs 1,09,315
Return on investment
- 23.87%
Had you bought the units on March 13, 2000 at Rs 10.88 per unit (that was the NAV then), you would have lost because the NAV was just 7.04 on March 7, 2005. But because you spaced out your investment, you won.
How an SIP scores
It makes you disciplined in your savings. Every month you are forced to keep aside a fixed amount. This could either be debited directly from your account or you could give the mutual fund post-dated cheques.
As you see above, it helps you make money over the long term. Since you get more units when the NAV drops and fewer when it rises, the cost averages out over time. So you tide over all the ups and downs of the market without any drastic losses.
Also, a number of mutual funds do not charge an entry load if you opt for an SIP. This fee is a percentage of the amount you are investing. And if you do not exit (sell your units) within a year of buying the units, you do not have to pay an exit load (same as an entry load, except this is charged when you sell your units).
If, however, you do sell your units within a year, you would be charged an exit load. So it pays to stay invested for the long-run.
The best way to enter a mutual fund is via an SIP. But to get the benefit of an SIP, think of at least a three-year time frame when you won't touch your money.
Of course you would lose money if your units lost value over time
Mutual Fund SIP: For Short term or Long term?
It may look very strange when everyone is advocating Mutual Fund Sip for long term, what is the necessity for this debate on ‘Is Mutual Fund SIP for Short term or long term?’. Before going into this, we will see what SIP & Mutual Fund is?
http://www.holisticinvestment.in/mutualfund-sip
Regards
Ramalingam K, MBA, CFP,
Director and Chief Financial Planner,
Holistic Investment Planners
“Best Performing Financial Advisor Award” Winners from CNBC TV18
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@ Sidharth: Great post. I think a major point to mention here is the fact that in a mutual fund, your risk is diversified. The portfolio that you choose can help leverage stock market ups and downs with possibly debt funds and even fixed deposits. The kind of mutual fund that one selects make a big difference in savings. For example, if you're young, you can choose to be an aggressive investor and choose equity growth mutual funds. Also, the track record of the fund manager makes a big difference. For people like me who belong to the salaried class, the only way to save better are mutual funds since it atleast beats inflation. I've written a post on this: https://www.filteredidiot.com/why-a-systematic-investment-plan-will-make-you-a-crorepati/
Would love to have your comments there.
While it comes about right time of investing in the mutual fund, there are many things that you have to know. Finding what is a best time for buying fund units will be hard and Systematic Investment plan ensures that one doesn’t need to invest lump sum at one go. But, there are a lot of reasons to know why investing in the Kotak mutual fund will make good return on percent
Benefits of Systematic Investment Plan:
- Small Amount of Investment can be done: To start investing in SIP it requires a very small amount. You can start investing in SIP with Rs.500 per month. With these benefits it does not make pressure on investor and also small investment is profitable for long term benefits.
- Less Risk: The risk is always linked to investing in the stock market. SIP can be invested in equity mutual funds. At a regular interval, small investment reduces the risk of investors to some extent. Know the risks of investing in mutual funds before investing.
- The ease: Investments in SIPs are easy, just once you give to the bank's mandate asset management company, after that, the amount is automatically deducted from your account each month and invested in your chosen plan.
- Disciplined investment: Once you have given the mandate in the bank, your investment starts in a viable manner. Due to the regular habit of investment, disciplined investment automatically comes to inhabit and you become able to invest in long terms.
- Easy to salary profession: Any investor can invest in a stock market, mutual fund or gold ETF through SIP. Investment intervals can be kept per day, per week or per month. This is an easy way of investing for salaried professionals. Large investments can be made in a regular and disciplined manner by saving some salaries every month.
- Flexibility: SIP can be closed at any time and there is no penalty for shutting it down. You can also stop it for a short time. Due to its flexibility, people are investing in SIP.
- No separate charge: No separate charge has to be given to start SIP. Still, you get all the benefits. You can get all the benefits of the Systematic Investment Plan at no extra cost.
- Ideal for Beginner Investors: This is the ideal way to invest for those who want to start investing for the first time. It saves investors from the sudden emerging market risk by investing together.
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