What is an SIP?
- An SIP is a specific amount,invested for a continuous period at regular intervals.
- It is similar to a regular saving scheme like a recurring deposit.
- It allows the investor to buy units as per a pre decided frequency; the investor decides the amount and also the scheme / scrip to invest in.
- Due to the principle of cost averaging, more number of units are bought in a falling market and fewer units in a rising market.
- SIPs allow you to take part in the stock market, without trying to time it, also bringing discipline to your investments.
What are the benefits of an SIP?
- Power of saving:The power of saving underlines the essence of making money work if only invested at an early age. The longer one delays in investing, the greater the financial burden to meet desired goals. Saving a small sum of money regularly at an early age makes money work with significant impact on wealth accumulation explained through the illustration below.Illustration:
AtendofYear5%10%15%20%1Rs.1,050Rs.1,110Rs.1,115Rs.1,1205Rs.1,276Rs.1,611Rs.2,011Rs.2,48810Rs.1,623Rs.2,594Rs.4,046Rs.6,19215Rs.2,079Rs.4,177Rs.8,137Rs.15,40725Rs.3,386Rs.10,835Rs.32,919 Rs.95,396 The above is for illustration purpose only. The SIP amount, tenure of SIP, expected rate of return and unit price are assumed figures for the purpose of explaining the concept of advantages of SIP investments. The actual result may vary from depicted results depending on scheme selected. It should not be construed to be indicative of scheme performance in any manner. Past performance may or may not be sustained in future. - Rupee Cost Averaging:Timing the market is a difficult task. Rupee cost averaging is an automatic market-timing mechanism that eliminates the need to time one`s investments. Here, one need not worry about where share prices or interest are headed as investment of a regular sum is done at regular intervals; with fewer units being bought in a declining market and more units in a rising market. Although SIP does not guarantee profit, it can go a long way in minimizing the effects of investing in volatile markets.
- Convenience:Three simple paperless steps to invest in an SIP:
1.Register for an SIP online
2.Fill the required details
3.Ensure availability of funds
4. Disciplined Investing:It’s the key to investing success. Regular investment makes you disciplined in your savings and also leads to wealth accumulation. Systematic investing is a time-tested discipline that makes it easy to invest automatically. Investing regularly in small amounts can often lead to better results than investing in a lump sum.
How does an SIP work?
An SIP means you commit yourself to investing a fixed amount every month.Lets say it is Rs. 1000/-. When the market price of shares fall,the investor benefits by purchasing more units; and is protected by-purchasing less when the price rises. Thus the average cost of unit sis always closer to the lower end making the investment profitable.The illustration below explains the benefit of an SIP over a lump sum. SIP - Rupee Cost Averaging Lump-Sum InvestorSIP InvestorMonthUnit Price (Rs.)Investment (Rs.)Unit Purchased^Investment (Rs.)Units Purchased^1509,0001801,00020247 1,00021345 1,00022444 1,00023546 1,00022648 1,00021749 1,00020850 1,00020952 1,00019Total InvestmentRs.9,000Rs.9,000Total Units Purchased180188Average Unit PriceRs.50Rs.48Value After 9 MonthsRs.9,360Rs.9,799^Fractional units ignored Hence,at the end of the period total units purchased will be 188 & cost per unit will be Rs. 48/-. Thus, the profit from the above investment will amount to Rs. 799/- (Rs. 9,799 – Rs. 9,000) The above is for illustration purpose only. The SIP amount, tenure of SIP, expected rate of return are assumed figures for the purpose of explaining the concept of advantages of SIP investments. The actual result may vary from depicted results depending on scheme selected. It should not be construed to be indicative of scheme performance in any manner. Past performance may or may not be sustained in future.