Systematic Investment Plan
SIP is a method of investing a fixed sum, on a regular basis, in a mutual fund scheme. It is similar to regular saving schemes like a recurring deposit. SIP allows one to buy units on a given date each month, so that one can implement a disciplined saving plan for themselves. SIP can be started with as small as Rs.500 per month in ELSS schemes to Rs.1,000 per month in diversified equity schemes.
Why SIP?
SIPs make the volatility in the market work in your favour
When you invest a fixed amount every month, it leads to disciplined investments
When you buy the units of a fund, you may do so when the NAV is really high. For instance, let’s say you bought the units of a fund when the bull run was at its peak, leading to a high NAV.
If the market dips after that, the value of your investments falls and you may have to wait for a long while to make a return on your investment. But, if you invest via SIP, you do not commit the error of buying units when the market is at its peak. Since you are buying small amounts continuously, your investment will average out over a period of time.
You will end up buying some units at a high cost and some units a lower price. Over time, your chances of making a profit are much higher when compared to an one-time investment to achieve your goals.
How does SIP work?
Say, every month you commit to invest, Rs.1,000 in your fund. At the end of a year, you would have invested Rs.12,000 in your fund.
Let’s say the NAV on the day you invest in the first month is Rs 20; you will get 50 units (i.e1000/20). The next month, the NAV is Rs.25.
You will get 40 units (i.e.1000/25). The following month, the NAV is Rs.18. You will get 55.56 units (1000/18).
So, after three months, you would have 145.56 units (i.e 50+40+55.56). On an average, you would have paid around Rs.21 per unit(i.e 3000/145.56). This is because, when the NAV is high, you get fewer units per Rs.1,000. When the NAV falls, you get more units per Rs.1,000.
