What is Systematic Investment Plan (SIP)?

What is Systematic Investment Plan (SIP)?

Through an SIP, an investor commits to invest a constant amount periodically. For instance, 5,000 per month. The investment is normally made in a mutual fund scheme or a gold fund of fund. As the market fluctuates, the scheme’s Net Asset Value (NAV) too will fluctuate. For the same investment of 5,000, when the NAV is higher, investor will receive fewer units; more units will be allotted when the NAV is lower.
In the example below, investor received the units at an average NAV of 11.375 per unit, during the period that NAV fluctuated between 11.25 and 11.50. Therefore, this investment approach is also called Rupee Cost Averaging.

Month

Investment (₹)

NAV (₹)

Number of Units

1

5000

11.25

444.44

2

5000

11.30

442.47

3

5000

11.35

440.52

4

5000

11.40

438.59

5

5000

11.45

436.68

6

5000

11.50

434.78

Total/Avg

30000

11.375

2637.48

SIP creates a habit of investment among an individual. It helps in long term wealth creation, while keeping the client away from the dangerous investment style of timing the market. It is important to note that SIP offers some downside protection, by averaging the cost at which the units are acquired. But SIP cannot prevent losses, if the market keeps falling. Investor can do SIP through post-dated cheques, Electronic Clearing service (ECS) facility offered by banks, or standing instructions given to the bank.

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