What is a Systematic Plan?
Systematic Investment Plan is an approach to investing within managed investments
which involves investing a set of amount at regular intervals rather than
investing a larger lump sum amount in one shot. By investing this way you
are not attempting to capture the highs and lows of the market but rather
the cost of your investment is averaged over a period of time. The essence
of SIPs is that when the markets fall investors automatically acquire more
units. Likewise they acquire lesser units when the market rises. This means
that you buy less when the price is high whereas you buy more the price is
low. Hence the average cost per unit drops down over a period of time.
Consider the following example of two rational people who each invest the
same amount of money into a managed fund over a period of time.
Investor A decides to invest Rs. 10000 now.
Investor B decides to invest by way of an SIP - Rs. 1000 each month.
Month |
Investor A
(In Rs.) |
Units Purchased
|
Investor B
(In Rs.) |
Units Purchased
|
Unit Price |
1 |
10000 |
1000 |
1000 |
100.0 |
10.0 |
2
|
0 |
0 |
1000 |
105.3 |
9.5 |
3 |
0 |
0 |
1000 |
114.3 |
8.8 |
4 |
0 |
0 |
1000 |
115.6 |
8.7 |
5 |
0 |
0 |
1000 |
118.3 |
8.5 |
6 |
0 |
0 |
1000 |
125.0 |
8.0 |
7 |
0 |
0 |
1000 |
117.6 |
8.5 |
8 |
0 |
0 |
1000 |
107.5 |
9.3 |
9 |
0 |
0 |
1000 |
95.2 |
10.5 |
10 |
0 |
0 |
1000 |
90.9 |
11.0 |
Total Investment |
Rs.10000 |
1000 |
Rs. 10000 |
1089.8 |
|
Total Value |
Rs.11000 |
|
Rs. 11988 |
|
|
The table shows that Investor B is in a better position by investing through
a Systematic Investment. It shows that at the end of the investment period
of 10 months Investor A who made an Lump sump investment has 1000 units in
his portfolio has a market value of Rs. 11000. Whereas, Investor B who made
investments through an SIP has 1090 units in his portfolio which has a market
value of Rs. 11988.
The reason that mutual funds are so popular is that they offer the ability to easily invest in increasingly more complicated financial markets. A large part of the success of mutual funds is also the advantages they offer in terms of diversification, professional management and liquidity.
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Power of Compounding
- The longer the period of your investment, the more wealth you accumulate
because of the power of compounding. That’s why it makes sense
to start investing early. Simply put, the incremental returns that you
earned on your principal plus the accrued gains is compounding. |
|
Rupee Cost Averaging
- Most investors want to buy stocks when the prices are low and sell
them when the prices are high. But timing the market is time consuming
and risky. A more successful investment strategy is to adopt this method
called Rupee Cost Averaging. By investing in an SIP you end up buying
more units when the price is low and fewer when the price is high. |
 |
Why invest
in SIP’s right now? |
The current scenario in equity market is dominated by negative sentiment,
which has led to fundamentals being ignored.
This scenario has created volatility in the markets and uncertainty of
future outlook.
The prudent way to invest in this scenario is to benefit from the volatility
and this can be done by investing through SIP’s
A monthly SIP helps in averaging out the cost of purchase and benefit from
power of compounding.
It also helps in creating wealth over a longer time period.
The current investment scenario is still dominated by negative sentiment.
This creates volatility in the markets due to confused minds of the investors.
Such volatility makes it difficult to capture the market movements and most
people end up losing money with the intention of timing the markets. Also
investing a lump sum in one shot might lead you to miss out on market opportunities.
The tool to beat such a scenario is investing through a Systematic Investment
Plan.
To set up a SIP, walk in to the nearest HDFC Bank branch.
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