Share Market

The Systematic is an investment mode – a means to invest in mutual funds and not an investment avenue. When an investor chooses to invest via an SIP, he makes investments (usually) in smaller denominations at regular time intervals as opposed to making a single lump sum investment. The underlying intention is to benefit from the volatility in equity markets by lowering the average purchase cost. Systematic Investment Plan (SIP) is a way of investing specifically designed for those who are interested in building wealth over a long-term. It is useful for those who want to get their investments going, but don’t have a large sum of money to invest at one particular point of time. The cardinal rule of building your corpus is to stay focused, invest regularly and maintain discipline in your investing pattern.

As mentioned earlier, the most important role of a Systematic Investment Plan is to lower the average purchase cost of an investment over the long-term. This is possible when equity markets experience a turbulent phase. Since the investment amount for each SIP installment is fixed, the investor gains by receiving a higher number of mutual fund units.

Systematic Investment Plan (SIP) is the winning strategy in present market scenario. Small investors can make their investments in Mutual Funds through SIP. They can enjoy the volatility by investing regularly. Since the amount invested per month is a constant, the investor ends up buying more units when the price is low and fewer units when the price is high. Therefore, the average unit cost will always be less than the average sale price per unit, irrespective of the market rising, falling, or fluctuating.

Let us take an example. Suppose the monthly SIP is for Rs 1,000 and the fund’s net asset value (NAV) is Rs 50; this will lead to 20 units being credited to the investor. However, in the next month on account of the volatile markets, the fund’s NAV falls to Rs 40. This will lower the average purchase cost; as a result, the investor will have 25 units credited to his account. This is how an SIP can help investors benefit from volatility in equity markets.

Systematic Investment Plan works in a well-diversified equity fund in the long run. When people put forth arguments that it does not work for them, they have either not chosen a right fund or are looking at a 12 month horizon.