11.5 Systematic Investment Plan (SIP)

SIP

Everyone is interested to know how we can minimize our risks in investments. In order to minimize the market risk we can always use a systematic investment plan (SIP). What is SIP? It is a simple and time honored investment strategy for accumulation of wealth in a disciplined manner over a long-term period. SIP is an ideal way to invest in equities as it not only allows us to build capital through smaller contributions but also helps us in tackling the volatility in the market. The plan aims at a better future for its investors as a SIP investor has better protection in the volatile market. If you want to put aside just a small amount regularly, you can plan a SIP as part of your monthly budget. Or, if you have a lump sum but do not want to invest all of it, using SIP can be a smart move. It helps you to build your portfolio one step at a time and also helps you to ride over market volatility. But above all, you benefit from ‘rupee cost averaging’. If the market goes up, the units you own will increase in value. If it goes down, your next payment will buy more units. Check out the figures for yourself. Look at the following example. Mr. Mahesh has Rs 60,000 and he plans to invest for a long term in stocks. On a day when the unit price is Rs 20, he buys 3,000 shares. On the other hand, a SIP investor (Manish) accumulates shares in a time-bound manner.

THE POWER OF RUPEE COST AVERAGING
LUMPSUM INVESTOR                         SIP INVESTOR MAHESH                                                       MANISH
Month Unit Price Amount      Invested Units Bought Amount Invested Units bought
1 20 60000 3000 10000 500
2 18     10000 556
3 14     10000 714
4 22     10000 455
5 26     10000 385
6 20     10000 500
TOTAL INVESTED                                              60,000                                          60,000
AVERAGE PRICE PAID                                    20                                                   19
TOTAL UNITS BOUGHT                                 3,000                                            3,110
VALUE OF INVESTMENT(6 MHTS)        60,000                                          62,200

* This example uses assumed fi gures and is for illustrative purposes only. Fractional units ignored.

Here you can see the difference. Mr Mahesh’s average price is Rs 20 whereas Mr Manish’s average price is Rs 19. It is obvious that Mr Manish’s strategy has worked out better. As an investor if you don’t have a lump sum amount to invest and also do not want to take much risk on your investment, you should always opt for the SIP option. This will enable you to invest regularly i.e. improve investing discipline.

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