A Systematic Investment Plan (SIP) Why it is good for you?

 August 23, 2011

Systematic Investment Plan (SIP): a long term disciplined investment technique under which you invest a fixed sum of money on a monthly or quarterly basis in a scheme at the prevailing NAV. This allows you to save and invest regularly while you are earning.

A SIP is like operating a recurring deposit account with a mutual fund. SIP is simply an investment method that enforces disciplined investment practice. You can plan your investment period anything like one year, three years or 5-10 years depending on your financial position and other commitments.

SIP as the name indicates calls for systematic investment. The markets are volatile. There can be ups and downs. A regular investor benefits tremendously from Rupee cost averaging. SIP is an ideal tool for long term investors. It greatly combats the uncertainties of the market and reduces the impact of a highly volatile market condition.

How it works

When you invest a fixed amount every month, the number of mutual fund units you actually buy depends on the market pricing (NAV) at that point in time. Therefore you tend to buy less units when the market moves up, and more units when the market moves down. This means that you are averaging out your cost.

Benefits of investing in mutual fund through SIP route:

· Small, regular investments: A simple way to enter the market by investing small amounts. Small but regular investments go a long way in creating wealth over time

· Rupee cost averaging: Fewer units during rising markets and more units during falling markets, thereby reduces the average cost per unit

· No need for ‘timing the markets’: No need to select the right time and quantity to buy and sell as timing the market is time consuming and risky. It eliminates the need to actively track the markets.

The success of your investment largely depends on the choice of your mutual fund scheme, after a careful analysis of its investment portfolio and past returns. Though past returns are not an assurance for future performance, they provide the investors a rough idea of what type of scheme they are getting locked into.

 

Investing through a SIP ensures that you do not commit the blunder of purchasing units when the market is at its peak. In a SIP the investor buys small amounts continuously over a time frame. Hence the investment will average out over a period of time. This is a simple investment strategy for accumulation of wealth in a disciplined manner over long term period.