Mutual Fund
ISA
SIP
Systematic Investment Plan (SIP) is an approach which involves investing a set amount at regular intervals rather than investing a larger lump sum amount in one shot. 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. 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 when the price is low. Hence, the average cost per unit drops down over time.
Consider the following example of two rational people who each invest the same amount of money into a managed fund over a period.
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 |
Units Purchased |
Investor B |
Units Purchased |
Unit Price |
|
|
(In Rs.) |
|
(In Rs.) |
|
|
|
1 |
10000 |
1000 |
1000 |
100 |
10 |
|
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 |
8 |
|
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 |
|
Total Investment |
Rs.10000 |
1000 |
Rs. 10000 |
1089.8 |
Up to 50 days |
|
Total Value |
Rs.11000 |
|
Rs. 11988 |
|
|
The table shows that Investor B is in a better position by investing through a Systematic Investment. At the end of the investment period of 10 months, Investor A who made a lump sum investment has 1000 units in his portfolio that 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.
