Yogita Loke tells you how SIPs work and their advantages
What is SIP?
Systematic Investment Plan (SIP) is a method whereby an investor makes a commitment to invest a fixed amount at specified intervals for a specified period. It is very similar to monthly saving schemes like a recurring monthly deposit/ post office deposit. Though there is no guarantee that your investor is always being better off making investment through SIP rather than lumsum. SIP comes with certain advantage as we will see.
How does an SIP help a lay investor?
SIP works on the principle of rupee cost averaging. It invests at pre-defined intervals inculcating a disciplined approach and works well in volatile market conditions. SIP enables your investor to buy more units when the market is down and buy fewer units when the market is rising. As a result, your investor ends up average out cost instead of catching the peak or the bottom.
For example: Let us take a look at 3 different scenarios – Falling Market, Rising Market & Volatile Market
When market is falling
|
Month |
Amount |
NAV |
No. of Units |
|
1 |
1000 |
10 |
100 |
|
2 |
1000 |
9 |
111 |
|
3 |
1000 |
7 |
143 |
|
4 |
1000 |
6 |
167 |
|
Total |
4000 |
32 |
521 |
|
Average NAV: 32/4= 8 |
|||
|
Average Cost Per Unit: 4000/521= 7.68 |
|||
When market is rising
|
Month |
Amount |
NAV |
No. of Units |
|
1 |
1000 |
10 |
100 |
|
2 |
1000 |
12 |
83 |
|
3 |
1000 |
13 |
77 |
|
4 |
1000 |
15 |
67 |
|
Total |
4000 |
50 |
327 |
|
Average NAV: 50/4= 12.5 |
|||