Systematic investment plans (SIP) are coming out as a popular investment option. SIPs involve investment on a systematic basis over a period of time. Under a SIP option, as investor commits making regular investments in a particular mutual fund/deposit. Investing in mutual funds through systematic investment plans is easier and efficient. It helps to grow one’s investment over a period of time.
The SIP option is available with all types of funds like equity, income or gilt. SIP is a long-term investment plan. The investor needs to set aside some amount of money every month for investing in a fund like a diversified equity fund or balanced fund. The investor needs to give post-dated cheques or debit advice to the fund house. The investor can put more amount also as per the policy of the fund. He can change the SIP structure only in the multiples of the SIP amount. In case an investor is investing in two different schemes of the same fund he can fill in a common SIP form for all the schemes. However, if the first holder in those schemes is different, they will have to fill different SIP forms, as the first holder has to sign on the form.
The investor invests a specific amount for a continuous period, at regular intervals. So, the investor can save compulsorily a fixed amount each month. He can also avail the advantage of rupee cost averaging. The investor automatically participates in the market swings. The amount of investment remaining the same, the investor buys more number of units in a declining market and less number of units in a rising market. By investing consistently the same amount at regular intervals, the investor’s average cost per unit will be lower than the average market price, irrespective of how the market is –rising, falling or fluctuating. The advantage of rupee cost averaging is that the net asset value (NAV) is averaged out, as the investor will be entering the fund at different NAVs, which may be higher or lower depending on the market condition. As such, the returns are enhanced under the SIP schemes.
Rupee cost averaging offers its greatest benefit with investments that tend to regularly fluctuate in price. When one invests the same amount in a fund at regular intervals over time, he buys more units when the price is lower. Thus, he may reduce his average cost per share over time. Thus, rupee cost averaging helps make market fluctuations work for the investor, and reduces the risk of investing all his money just before a market downturn.
SIPs can be especially effective when used in buying equity funds. The NAVs of these funds can vary widely. Through rupee cost averaging, an SIP can make this volatility work for the investor. It is to be noted that rupee cost averaging may not work well if the market rises continuously.
As it is systematic, SIP ensures that one plans for his long-term goals along with the short-term goals. SIPs offer a disciplined investment plan and help reduce the susceptibility to market fluctuations. It helps preserve capital and also translates into substantial creation of wealth in the long run.
An investor who is not having a lump-sum amount to invest and also does not want to take much risk on his investment should always select a SIP option. This will enable him to invest regularly. Some plans now also offer additional features like life insurance.
The investor is at a liberty to enter or exit from the scheme whenever he wishes to , depending on the market conditions. He can redeem his units any time irrespective of whether he has completed his minimum investment in that scheme or not. SIP offers more flexibility and helps identify funds that suit one’s risk-return profile. In case of SIPs, the asset allocation keeps pace with the investor’s changing risk return profile Also; it offers instant liquidity whenever required.
An Article from Economic Times Dated 1st April 2006
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