Systematic Investment Plans (SIPs)

Systematic investment plans or SIPs as they are known popularly are the investment vehicles offered by various mutual funds across the world. If you are in the world of investing, then you must have come across the jargon of ‘timing the market’. In layman terms this suggests that you should have acumen of judging the right time to enter and similarly the right time to exit from the bourses. But this seemingly innocuous principle is the most difficult art to exercise. For this, you need to follow the markets religiously and also you should have an expertise in your respective area. Thus SIPs provide you a easy way out, when you do not need to worry about the vagaries of market, and can keep on accumulating wealth nonchalantly.

For whom SIPs are for?

Systematic investment plans are for those investors, who do not wish to play with the volatility of the market and do not have the desire to ‘time the markets’. It’s a conservative way of investing, and mind you not trading, because traders are never going to draw out any benefit from it. These are generally used to meet the long and mid-term investment goals of the investor as they hardly give attractive returns in the short time horizon. If you are an investor, who want to accumulate wealth, but do not want to scratch your head following the fickle market, these products should be in your kitty.

How does SIP work?

The fundamental working of SIP is similar to the EMI which you pay on the monthly basis. When you subscribe to a Systematic investment plan, a pre-decided monthly contribution gets debited from your account which is linked to the MF Account. The minimum amount of installment depends from fund-to-fund, but generally these come with the base installment of Rs1000 with installments in the multiples of 1000.

How does SIP add Value?

The Principle on which SIP works is “Rupee Cost Averaging”. Let us dwell on this a bit further, as you may be aware that Mutual Funds are traded in the form of units. At the end of trading day, as mandatory by SEBI, every MF declares its Net Asset Value (or NAV). NAV is the total value of the units of the mutual fund in the market. Thus when you wish to invest some amount in MF, say Rs 1000, then the NAV of MF is divided by 1000, and you get the units worth Rs 1000. Thus, the crux is, the number of units which you get depends on the NAV of the fund.

Now in the case of SIP, since you are investing a fixed amount every month, thus your number of units attained every month will differ according to the NAV of the fund in which you are investing. Thus during the bullish time, the units attained by you would be less due to the higher NAVs of the fund, while during negative sentiments, you get more units for your contribution due to dip in NAVs.

Let’s understand it with an example:

• Investor A has invested lump-sum amount of Rs 10,000

• Investor B is investing Rs 1000 every month

Month Investor A Units Purchased Investor B Units Purchased Unit Price

1 10000 1000 1000 100 10

2 0 0 1000 105.3 9.5

3 0 0 1000 114.3 8.8

4 0 0 1000 115.6 8.7

5 0 0 1000 118.3 8.5

6 0 0 1000 125 8

7 0 0 1000 117.6 8.5

8 0 0 1000 107.5 9.3

9 0 0 1000 95.2 10.5

10 0 0 1000 90.9 11

Total Investment Rs.10000 1000 Rs. 10000 1089.8

Total Value Rs.11000 Rs. 11988

As evident from the table, with the time elapsed, the value of A Systematic Investment plan increases in comparison to deposit money in a lump-sum amount.

Another advantage of SIP is the benefit of time compounding which gets accrued to the investor. Thus, in a window of 15-20 years, a substantial amount of corpus gets accumulated.

Why SIPs are Beneficial?

• It inculcates the habit of saving regularly, which helps in maintaining discipline and thus helps a lot in the wealth creation for meeting targets.

• It discourages investors from timing the markets, which is actually beneficial for them due to lack of their acumen and expertise.

• It averages out the dips and rises of the market, so that investor’s money remains fairly secured.

• It accrues the benefit if time compounding to the investors.

“Remember!!… a rupee a day.. Will keep your worries away “….