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What is Systematic Investment Plan (SIP)?

What is Systematic Investment Plan (SIP)?


Systematic Investment Plan

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’
Sl No. Month NAV Amount Units Amount Units
1. Jan 15 9.752 1000 102.5431 12000 1230.517
2. Feb 15 9.554 1000 104.6682
3. Mar 15 9.354 1000 106.9061
4. Apr 15 9.112 1000 109.7454
5. May 15 8.911 1000 112.2209
6. Jun 15 8.633 1000 115.8346
7. Jul 15 8.412 1000 118.8778
8. Aug 15 8.234 1000 121.4477
9. Sep 15 7.914 1000 126.3584
10. Oct 15 7.452 1000 134.1922
11. Nov 15 7.112 1000 140.6074
12. Dec 15 8.124 1000 123.0921

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

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What is Systematic Investment Plan (SIP)?
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