SIP: Systematic Investment Plan

Video with Malayalam AUDIO . Courtesy :Finance Chanakya

A SIP is a means of investment offered by various mutual funds to its investors. SIP allows them to make the investment in small amounts on regular intervals. The investors can invest their money quarterly, monthly, or weekly. A fixed amount is auto-debited from the policyholder’s account and invested in mutual funds. A pre-decided number of units are allocated at the current market price. Since these plans are flexible in nature, the investors can increase the amount or discontinue investing in the plan whenever they wish to.

How to Get Started with SIP Investment?

When it comes to SIP, getting prepared is as important as playing the game itself. You need to follow 4 easy steps before you actually start investing in SIP.

•  Set your financial goals – Your goals should be specific and attainable.   

• Set a timeline – Decide when you need the money; this will be your investment tenure.

• Decide how much you need to invest – With the help of a SIP calculator, figure out the amount you need to invest regularly to accomplish your financial goals.

•  Make a choice – Consult your financial advisor and go for a plan that meets your needs well.

Now you are all set to go. The money can be paid through ECS (Electronic Clearing Service) in which you give a standing instruction to your bank to auto debit the investment amount from your account every month. The sum that you invest every month in the chosen SIP is invested in a mutual fund and makes money for you. You can log on the company’s website and track your portfolio.

How does SIP work?

Systematic Investment Plan(SIP) works more or less like a mutual fund. The handling of your money is done by money market experts and is none of your headache. But it is good to know how SIP makes your money grow. Well, there are two underlying mechanisms behind the working of SIP.

Effect of Compounding

Unlike simple interest, the compounding involves making the interest earned, a part of your base capital and the subsequent interest is calculated on the basis of this new increased capital. Thus, Compound Interest leads to an exponential growth of your money. The effect of compounding increases as the investment tenure increases. The table below illustrates the fact.

	SIP Investment Input (Rs)	SIP Investment Tenure	Rate of Interest	Returns (at the end of the tenure) (Rs)	Total Output (Rs)
Simple Interest	100	5 years	10%	50	150
Compound Interest	100	5 years	10%	61	161

As can be seen, there is a 7% rise in the total output when the interest is calculated on a compounding basis. This seemingly small difference in the final output becomes staggering as the period of investment lengthens. The table below shows the figures when calculated for a period of 20 years. As you can see, the difference becomes even more than twice in the long run, when the effect of compounding is playing up.

	SIP Investment Input (Rs)	SIP Investment Tenure	Rate of Interest	Returns (at the end of the tenure) (Rs)	Total Output (Rs)
Simple Interest	100	20 years	10%	200	300
Compound Interest	100	20 years	10%	573	673

Rupee Cost Averaging

Consider a scenario – You decides to invest in a SIP and buy the market units by investing Rs 1000 per month for 6 months. Obviously, you will be bagging more units when NAV is low and lesser units when NAV is high. On the other hand, Your friend makes a one time investment by buying units for Rs 6000 at the current NAV. Who do you think is going to end up with a lower cost per unit at the end of the 6 months period?

Month	NAV (Rs)	Monthly Investment made in SIP (Rs)	No. of Units	Average Cost Per Unit	One Time Investment made in a plain Mutual Fund (Rs)	No. of Units	Average Cost Per Unit
1st	15	1000	67	12.42 Rs/Unit	6000	400	15 Rs/Unit
2nd	12	1000	83
3rd	10	1000	100
4th	12	1000	83
5th	15	1000	67
6th	12	1000	83
Total		6000	483

As can be seen from the table above, You will be enjoying a gain of Rs 2.58 per unit over Your friend. Play it  smart by investing consistently for a period of time. In the long run you will be less and less affected by the ups and downs of market, as the time period will lead to an averaging of the market fluctuations. This effect is called as Rupee Cost Averaging and is primarily responsible for making SIP a lucrative investment.

Perks of SIP

•         Flexible and affordable investment options – You can always start with smaller amounts and increase the sum of investment as your earning grows with time.

•         Free of entry or exit charges – If you invested in SIP and discovered that it doesn’t work well for you, you can put a brake to making further investments and withdraw every single penny without incurring a penalty.

•         Saves you time – By opting for ECS, you drive handsfree. You can go to your own business while your money takes care of itself.

•         Keeps you stress free – Unlike a mutual fund, you are free of the tension stemming from the ups and lows of market.

•         Saves you overloading your head – You need not to have a know-how of the market or the tactics that go into switching between funds. It is all done for you by the money market experts.

Keep in Mind

•         Start early, earn bigger returns

•         Stay longer, enjoy the compounding effect

•         Be patient, the money is sure to grow in the long run

•         Be consistent, never skip your monthly payment

SIP is a more risky investment comparing to RD and PPF etc. With Risk there is a Chance to earn more .

The Advice

It is really ideal to invest in SIP as well as other Risk free return options like RD’s and other such investments .

Say you are planning on investing Rs.1500/- every month . Since in the beginning of SIP Investment  you won’t be getting the  Rupee Cost Averaging benefit . It is ideal to Invest a part of the investment in other Risk free Investments . Say split 1500 (500 in sip and 1000 in other safe investments ). And as time goes by you can increase the investment in SIP.