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.
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 -
Mutual fund schemes may be classified on the basis of its structure and its investment objective
|Month||Amount Invested (Rs.)||Rising Market||Falling Market||Volatile Market|
|NAV||Units Alloted||NAV||Units Alloted||NAV||Units Alloted|
|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.
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|
|Average Unit Cost||(Rs. 12,000/1435.9) = Rs. 8.36||(Rs. 12,000/961.1) =
|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.