All About SIP

About SIP


investor explaining about SIPIt is more famously known as SIP. It is bit by bit systematic investment. Under this plan your investments are staggered. That is you invest a fix sum either monthly or quarterly in a mutual fund. Say, for example, you commit to invest a pre-specified amount (Rs 500 onwards) every month or quarter in a mutual fund in India. You fix a date on which every month or every quarter the amount gets invested. The first investment can be done by a cheque or online payment from your bank and then the monthly investments gets automatically debited through NACH (National Automated Clearing House), erstwhile ECS and by registering through OTM (One Time Mandate).

In OTM you give permission for the amount to be directly deducted from your bank account on the fixed due date. The units are allocated as per the then prevailing NAV on that day of the month. You get more number of units if the NAV is low and vice versa if the NAV is high.

Rupee Cost Averaging

It means averaging the cost price of your investments


SIP helps in averaging the cost as equal amount is invested regularly every month at different NAVs. SIP works well in a volatile market as in the months where markets are down you get more number of units (Units are bought depending on your amount invested and NAV) as the NAV is down and when the markets are up you get less number of units. But over all the prices (NAV) gets averaged out.

Let us see how: Say you make your first investment of Rs 1,000 at a NAV of Rs 10. In this case, the units acquired will be 100 (1,000/10). You make the next investment of Rs 1,000 at a NAV of Rs 12. Units acquired now will be 83.33333 (1,000/12). Now also suppose that you make the third investment of Rs 1,000 at a NAV of Rs 9 and the units acquired will be 111.1111 (1,000/9).

The average purchase cost works out to Rs 10.19 (3,000/294.4444).

This concept, however, may not work in a rising market. As the markets are constantly rising, you acquire less and less units and the average cost does not work in our favour. This is especially true in the shorter period. But in the long term scenario, as the market is always volatile, the cost is averaged out and the downside risk is protected.