Systematic Investment Plan – A Disciplined Tool

What is a Systematic Investment Plan?

Systematic Investment Plan is an approach to investing within managed investments which involves investing a set of amount at regular. By investing this way you are not attempting to capture the highs and lows of the market but rather the cost of your investment is averaged over a period of time. The essence of SIPs is that when the markets fall investors automatically acquire more units. Likewise they acquire lesser units when the market rises. This means that you buy less when the price is high whereas you buy more the price is low. Hence the average cost per unit drops down over a period of time.

Consider the following hypothetical example of two rational people who each invest the same amount of money into an actively managed mutual fund over a period of time.

• Investor A decides to invest Rs. 10000 now.
• Investor B decides to invest Rs. 1000 each month.

Advantages Of SIP

Power Of Compounding

The longer the period of your investment, the more wealth you accumulate because of the power of compounding. That’s why it makes sense to start investing early. Simply put, the incremental returns that you earned on your principal plus the accrued gains is compounding.

Rupee Cost Averaging

Most investors want to buy stocks when the prices are low and sell them when the prices are high. But timing the market is time consuming and risky. A more successful investment strategy is to adopt this method called Rupee Cost Averaging. By investing in an SIP you end up buying more units when the price is low and fewer when the price is high.