It is more famously known as SIP. It is bit by bit systematic investment. Under this plan your investments are staggered. A Systematic Investment Plan or SIP is a smart and hassle free mode for investing money in mutual funds. SIP allows you to invest a certain predetermined amount at a regular interval (weekly, monthly, quarterly, etc.).

The first investment has to be by a cheque and then you can either give post datedcheques (PDCs) or opt for electronic clearing system (ECS). The income earned through these investments and the capital appreciation realised are shared by its unitholders in proportion to the number of units owned by them. Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost. SIP helps in averaging the cost as equal amount is invested regularly every month at different NAVs. SIP works well in a volatile market as in the months where markets are down you get more number of units as the NAV is down and when the markets are up you get less number of units. But over all the prices gets averaged out. Let us see how: Say you make your first investment of Rs 1,000 at a NAV of Rs 10. In this case, the units acquired will be 100 (1,000/10). You make the next investment of Rs 1,000 at a NAV of Rs 12. Units acquired now will be 83.33333 (1,000/12). Now, also suppose that you make the third investment of Rs 1,000 at a NAV of Rs 9 and the units acquired will be 111.1111 (1,000/9). The average purchase cost works out to Rs 10.19 (3,000/294.4444). However, this concept may not work in a rising market. But in the long term scenario the market is volatile, the cost is averaged out and the downside risk is protected.

How Does SIP Work?

SIP is a easy and flexible investment plan. Your money will get auto-debited from your bank account and will get invested into a specific mutual fund scheme which you have selected. Every time you invest money, additional units of the scheme are purchased at the market rate and added to your account. The investor is allocated with certain units (called NAV or net asset value) based on the market rates. Hence, units are bought at different rates and investors benefit from Rupee-Cost Averaging and the Power of Compounding. Besides SIP is most beneficial if markets are volatile or going down after you invested.

Wealth Creation through SIP

Plan your SIP Investments. Frequent Intervals i.e. monthly, quarterly or semiannually increase chances of buying units when prices are low. Diversify your investments. Since, Mutual Fund investments are diversified; it not only reduces risk but also helps in optimizing returns. Chart out a long-term investment plan. SIP works best for long-term investment periods and helps the long-term investor reap good returns over a period of time. Long-term investors tend to profit from the appreciation markets tend to show in the long-term.

SIP schemes