What is Systematic Investment Plan (SIP)?
Systematic Investment Plan (SIP) is an investment option where a fixed sum of money is invested in a mutual fund at regular intervals. These intervals could be monthly or quarterly depending on investors’ choice. Before starting SIP, investors should identify the best funds and the amount required to achieve the financial objectives. SIP helps investors save and invest periodically over a longer period and get an attractive return at the end. Many investors try to buy stocks at low price and sell at high price to earn profit. But timing the market is very difficult and very irrational and risky.
Systematic Investment Plan (SIP) is the most successful investment strategy as it follows the method known as ‘Rupee Cost Averaging’. The example given below illustrates how SIP can help investors to average buying price lower than price in one time investment method. Here investor ‘A’ starts SIP of Rs. 1000/- monthly in a diversified mutual fund scheme in January. Investor ‘B’ invests Rs.12000/- in one time investment in the same scheme. See the performance from January to December in a given table.
|Fund details||Investor ‘A’||Investor ‘B’|
Here at the end of the twelve months, we find Investor ‘A’ has more units than Investor ‘B’, where as both have invested the same amount. This happened due to the average cost of Investor ‘A’ is lower than that of Investor ‘B’ because Investor ‘B’ made only one investment at the time when the unit price was at its peak, while Investor ‘A’ opted SIP and invested twelve times.
Investor ‘A’ average unit price = 12000/1416.494 = Rs. 8.472
Investor ‘B’ average unit price = Rs. 9.752