A Systematic Investment Plan (SIP) lets you invest in small amounts in mutual fund on a regular basis. It gives you a lot of flexibility and is a very convenient way of making a large corpus over a period time. In mutual fund terminology, SIP permits the investors to invest a fixed amount every month or quarter for purchasing additional units of the scheme at NAV based prices.
If you invest an equal amount of money every month in a mutual fund, you are engaging in rupee-cost averaging. Your money get invested in share market. When prices are high, NAV is high – so you get less. And when prices are low, NAV is low – so you get more. If you are lucky enough, you would get more. But for that you would need to be an expert. So, in the interest of an average investor, a SIP ensures that the chances of losing out of an investment are spread out and thus minimized.
Let’s take an example. Suppose an investor invest Rs. 1000 under the Systematic Investment Plan on a monthly basis. Using the SIP strategy the investor can reduce his average cost per unit. The investor gets the advantage of getting more units when the market has turned downwards.
So, how does a SIP operate? .
An investor can invest a fixed amount every month for at least 6 months or more through post-dated cheques or through auto debit facility in select centers. Investors are advised to indicate their choice on their application form in the box provided for the purpose. The post-dated cheuqes should be dated the 5th 15th 25 of every month. This will make it easy for you to keep a track of your regular contributions.
Benefits of SIP :. 1) It’s an expert’s field. Let’s leave it to them. Management of the fund by the professionals or experts is one of the key rewards of investing through a mutual fund. They regularly carry out extensive research – on the company, the industry and the economy – thus ensuring informed investment.
Secondly, they regularly track the market. Thus for many of us who do not have the trusted expertise and are too busy with our vocation to devote sufficient time and effort to investing in equity, mutual funds offer an attractive.
2) Putting eggs in different baskets. Another advantage of investing through mutual funds is that even with small amounts we are able to enjoy the benefits of diversification. Huge amounts would be required for an individual to achieve the desired diversification, which would not be possible for many of us.
Diversification reduces the overall impact on the returns from a portfolio, on account of a loss in a particular company sector.
3) It’s all transparent & well-regulated. The mutual fund industry is well modulated both by SEBI (Securities and Exchange Board of India) and AMFI (Association of Mutual Funds in India). They have, over the years, introduced regulations, which guarantee smooth and transparent functioning of the mutual funds industry.
This makes it safer and convenient for investors to invest through the mutual funds.
4) Market timing becomes irrelevant. One of the biggest difficulties in equity investing is WHEN to invest, apart from the other big question WHERE to invest. While, investing in a mutual fund solves the issue of ‘where’ to invest, SIP helps us to overcome the problem of ‘when.’ .
SIP is a disciplined investing irrespective of the state of the market. It thus makes the market timing totally irrelevant. And today when the markets are high, it may not be prudent to commit large amounts at one go.
With the next 2 3 years looking good from Indian economy point of view, one can wait handsome returns through’ regular investing.
5) Does not strain our day to day finances. Mutual funds permit us to invest very small amounts (Rs 500-Rs 1,000) in SIP. This makes investing easier as it does not strain our monthly finances. It, therefore, becomes an ideal investment option for a small time investor, who would otherwise not be able to enjoy the benefits of investing in the equity market.
6) Reduces the average cost. In SIP we are investing a fixed amount regularly . Therefore, we end up buying more number of units when the markets are down and NAV is low and less number of units when the markets are up and the NAV is high. This is called rupee-cost averaging.
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