Systematic Investment Plans (SIP) in Mutual Funds are gaining popularity with investors. Unlike some investors who like to park their money as a lumpsum into a Mutual Fund Scheme, and forget about it, investors going in for SIP have an edge.
In investment terms, Systematic Investment Plans (SIP) follows a methodology known as Rupee Cost Averaging, under which investors have a choice to invest a fixed sum, as low as Rs.500, at regular intervals.
What is Rupee Cost Averaging?
Investing in mutual funds in a systematic and regular way is better than waiting for what you think is the correct time to invest. Under Rupee Cost Averaging method investors like you can put a fixed amount at regular intervals into the mutual fund of your choice.
This method eliminates the need to time the market, making an entry or an exit, an area where most investors are prone to go wrong. Basically, under an SIP option an investor commits making a regular monthly investment in a particular mutual fund.
For instance, if you were to buy units of a mutual fund by following rupee cost averaging, the fixed amount of money will fetch more units when the net asset value of the units are down, and vice versa.
The other investment option comparable to SIPs is the recurring deposit schemes from Post office and banks.
How does Rupee Cost Averaging benefit you?
The main advantage of the Rupee Cost Averaging Method is that it compulsorily enforces regular investments, it saves you the trouble of constantly being on tenterhooks, looking for the right time to invest. Under this system, one need not worry about when and how much to invest. A fixed sum of money can be invested regularly and over time it averages out the costs.
Further, it forces investment even during market downturns when the natural tendency of most investors is to stay away from the market. What one must remember here is that what price you pay for a single unit does not matter but the average price at the end of purchase is what holds and the returns are based on this average cost. This automatically falls in line with the age-old principle of buy low and sell high.
And finally, it allows you to make fresh investments at zero cost, as most funds do not charge any loads on such investments.
Following tables illustrates the details if you were to invest Rs. 24,000 either in lumpsum today at a Net Asset Value (NAV) of Rs. 15 or use Rupee Cost Averaging investment methodology through Systematic Investment Plan (SIP) of Rs. 2000 monthly for a period of one year :
SIP of Rs.2000 for a period of one year : |
|||||||
|
Month |
Amount Invested (Rs) |
Fluctuating Market |
Rising Market |
Falling Market |
|||
|
NAV |
Units |
NAV |
Units |
NAV |
Units |
||
|
1 |
2,000 |
15 |
133.333 |
15 |
133.333 |
15 |
133.333 |
|
2 |
2,000 |
12 |
166.667 |
15 |
133.333 |
14 |
142.857 |
|
3 |
2,000 |
9 |
222.222 |
16 |
125.000 |
12 |
166.667 |
|
4 |
2,000 |
10 |
200.000 |
17 |
117.647 |
11 |
181.818 |
|
5 |
2,000 |
13 |
153.846 |
19 |
105.263 |
10 |
200.000 |
|
6 |
2,000 |
15 |
133.333 |
20 |
100.000 |
9 |
222.222 |
|
7 |
2,000 |
12 |
166.667 |
21 |
95.238 |
9 |
222.222 |
|
8 |
2,000 |
10 |
200.000 |
22 |
90.909 |
8 |
250.000 |
|
9 |
2,000 |
13 |
153.846 |
24 |
83.333 |
8 |
250.000 |
|
10 |
2,000 |
16 |
125.000 |
26 |
76.923 |
7 |
285.714 |
|
11 |
2,000 |
14 |
142.857 |
27 |
74.074 |
7 |
285.714 |
|
12 |
2,000 |
12 |
166.667 |
28 |
71.429 |
6 |
333.333 |
| Total |
24,000 |
151.00 |
1964.438 |
250.00 |
1206.482 |
116.00 |
2673.880 |
| Average cost per unit |
12.22 |
19.89 |
8.98 |
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Comparing Lumpsum Investment with SIP |
|||
| LumpSum Investment | SIP Investment | Better Option | |
| Average cost per unit | |||
| Fluctuating Market : | Rs. 15 (investment price) | Rs. 12.22 (i.e.Rs.24,000/1964.438 units) | SIP Investment |
| Rising Market : | Rs. 15 (investment price) | Rs. 19.89 (i.e.Rs.24,000/1206.482 units) | Lumpsum Investment |
| Falling Market : | Rs. 15 (investment price) | Rs. 8.98 (i.e.Rs.24,000/2673.880 units) | SIP Investment |
This shows how investing regularly can fetch you better results as compared to lumpsum investment in Fluctuating Market and Falling Markets. However, you will fare well by making a lumpsum investment instead of an SIP in a, utopian, ever rising market.
Conclusion
Regardless of the amount of money that you have to invest, Rupee Cost Averaging is a long-term investment strategy. While the financial markets are in a constant state of flux, they tend to move upward over a fairly long periods of time. Bear markets and bull markets can last for months, if not years. Because of these trends, Systematic Investment Plans (SIP) is a valuable investment strategy for smart investors.
I have SIP for 10000 per month but in rising market it is not that much benificial, as in other two situations, whats your opinion ?
Dear Khalid,
Yes, you are absolutely right. In a rising market your average entry price goes up month-on-month which makes the overall investment price higher than the lumpsum investment price. But as you know, Predicting a continuous bull run is golden, not every one can bell the bull, 🙂
SIP takes off the risk of Market Timing and provides you an opportunity to invest small sum at regular interval which can help in the long run.