SIP - Systematic Investment Plan

Systematic Investment Plan - SIP

Systematic Investment plan - SIP

It is one of the best and very simple method of investing in Mutual Funds. This is the method in which a common man who does not know much about Equity market and mutual fund can invest and earn smart profits.
 
If a person wants to invest in mutual funds without much efforts, can opt for SIP method of investing.

What Is SIP?

SIP is a method of investing a fixed sum of money, regularly (On fixed dates of months), in a mutual fund scheme. SIP allows one to buy units on a given date each month, so that one can implement a saving plan for themselves. The biggest advantage of SIP is that one need not time the market.

Let us understand SIP with an example

Client : Hi Mr. Advisor, I want to know the difference between stock SIP vs Mutual fund SIP.  Which one is better & why ? Can u explain both the concepts ?

Advisor : Yes sir surely. Why not.

Well, stock SIP is averaging and Mutual fund SIP is rupee cost averaging.

Albert Einstein quote...
Compound interest is the eighth wonder of the world
Our quote...
SIP is ninth wonder of the world 
Client : Oho.. How !!! 

Advisor : Let say, you want to buy 10 Kg. apple every month. 
Price of apple in January  - 20 per kg. Your expense is Rs.200, right?
Price of apple in February- 40 per kg. Your expense is Rs.400

The average per kg cost is 20 + 40 = 60 / 2 = 30 per kg.

This is average and your stock SIP is working on same principle. 

Client: Then what is rupee cost averaging?

Advisor : Suppose your budget is to spend Rs. 200 per month on apple. No matter what is the price.

Price of apple in Jan - 20 per kg, so you can buy 10 kg. (200/20)

Price of apple in Feb - 40 per kg. So you have 5 kg. (200/40)

Now tell me the average of per kg apple. 

Client: Same 30 per kg

 Advisor : No.

Number of kg you bought = 10 + 5 = 15
Total cost = 200 + 200 = 400
Average cost = 400 /15 = 26.66 Per Kg.

Now in the above example as stock SIP, you bought of  apple is averaged at Rs. 30. per kg.  & as Mutual Fund SIP, your buying cost is averaged at Rs. 26. 66 per Kg. for the same apples.

This is Rupee cost averaging. Mutual fund SIP is working on this principle

Client: oh great!! So every time our cost per unit is less than its avg.  Now I fully understood rupee cost averaging. It's awesome.

I think, By reading above example one could easily understand how the SIP investment works.

now a days many companies provide services in Investing in SIP's and there are many AMC's (Asset Management Companies) who provide different mutual funds.

So, read and understand the Fund's behavior and then invest.

Comments

  1. Clear and very well explained the way of investment.

    ReplyDelete
  2. Exemplanary example ...easy to understand..👌👌👏👏

    ReplyDelete
  3. I am very thankful to you that you have shared this information with us. I got some different kind of knowledge from your web page, and it is really helpful for everyone. Thanks for share it. high yield investment in Nigeria

    ReplyDelete

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