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SBIS INDIA

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Systematic Investment Plan


What is Systematic Investment Plan?


Systematic Investment Plan (SIP) is a disciplined way of investing, where you invest fixed amounts at a regular frequency. You often decide to start saving and investing regularly, but get caught up in your day to day activities and forget investments. SIP, the time-tested investment approach helps bring in the much-needed discipline, and has shown good results the world-wide.


Advantages of SIP

An SIP helps you reach your financial goals by investing a fixed sum monthly / quarterly, in your chosen fund, for a pre-determined number of periods. So that you -

  • Average out on market fluctuations (no need to time the market).
  • Get investment discipline, helping you invest for and reach your future goals.
  • Invest disposable funds – that might otherwise lie in Savings accounts, earning low interest and letting inflation eat into them.

How to start an SIP

Mutual fund schemes may be classified on the basis of its structure and its investment objective

  • Pick any date of a month, then fill out an SIP form and an application form.
  • Draw post-dated monthly / quarterly cheques , adding up to at least minimum investment of scheme.
  • Monthly - Start with any dates of any month, and stick to the same date of every month.
  • Quarterly - Start on of any month, and stick to the same date of every third month.
  • If in any month the chosen date is not a Working Day, the transaction will be completed on the next Working Day.

Illustration

Month Amount Invested (Rs.) Rising Market Falling Market Volatile Market
    NAV Units Alloted NAV Units Alloted NAV Units Alloted
1 1,000 10 100.00 10 100.00 10 100.00
2 1,000 12 83.33 8 125.00 12 83.33
3 1,000 14 71.43 6 166.67 8 125.00
4 1,000 16 62.50 4 250.00 10 100.00
Total 4,000 52 317.26 28 641.67 40 408.33
Average Purchase NAV (Sum Total of NAV's/Total Number of investments made) 13.00 7.00 10.00  
Average costs per unit (Sum Total of Investment/ Sum Total Units Alloted) 12.61 6.23 9.80  

Thus we see that the average unit cost under Systematic Investment Plan will always be less than the average purchase price per unit irrespective of the market rising, falling or fluctuating.


Difference of SIP in Fluctuating Market and Rising Market

Let us suppose that you would like to invest Rs. 1,000 every month, in an equity fund using the SIP. The following table shows how your investments would look in the two scenarios of fluctuating and rising market


Month Amount Invested (Rs.) Fluctuating Market Rising Market
Purchase Price (Rs.) Purchase Price (Rs.) No. of Units Purchased Purchase Price (Rs.) No. of Units Purchased
Investment 1,000 10.00 100.00 10.00 100.00
1 1,000 8.20 121.95 10.50 95.24
2 1,000 7.40 135.14 11.00 90.91
3 1,000 6.10 163.93 11.50 86.96
4 1,000 5.40 185.19 12.00 83.33
5 1,000 6.00 166.67 12.40 80.65
6 1,000 8.20 121.95 12.90 77.52
7 1,000 9.25 108.11 13.35 74.91
8 1,000 10.00 100.00 14.00 71.43
9 1,000 11.25 88.89 14.50 68.97
10 1,000 13.40 74.63 15.00 66.67
11 1,000 14.40 69.44 15.50 64.52
TOTAL 12,000 1,435.90 961.11
Average Unit Cost (Rs. 12,000/1435.9) = Rs. 8.36 (Rs. 12,000/961.1) =
Rs. 12.49
Average Unit Price (Sum of Purchase price / 12) = Rs. 9.13 (Sum of Purchase price / 12) = Rs. 12.72
Assumed NAV @ Q12 Rs. 14.90 Rs. 16.00
Market Value (1435.9 units x Rs. 14.90) = Rs. 21,395 (961.11 units x Rs. 16.00) = Rs. 15,378

Therefore, the average unit cost is lower than average unit price irrespective of market rising or fluctuating. This happens because you get the advantage of buying more units when the market is low and averaging out the purchase price.


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