Overview – System Investment Plan (SIP)
System Investment Plan (SIP) is the plan where investor makes equal investments at regular intervals into mutual funds on a specific date for a specific period. The biggest advantage is the averaging of the investments made where the market fluctuations are eliminated.
How does SIP runs ?
Investor makes equal investments at regular intervals over a period of time (minimum 6 months).
For an example, investor invests Rs.10,000 in mutual funds where the NAV (Net asset value) is Rs.100. He gets 100 units of mutual funds. Now once he purchases the mutual funds, the markets go down and the NAV value comes down to Rs.95. The current investment value would be Rs.9,500 (Rs.95 x 100 units).
However in case of SIP, say investor takes the SIP Rs.5,000 in mutual funds where NAV is Rs.100 on 1-Jun (recurring every month on 1st of the month). He gets 50 units of mutual funds. Now the market goes down by end of the month and NAV is Rs.95. On 1-Jul through SIP the investor again invests Rs.5,000, but now he gets 52.63 units (Rs.5,000 / 95). He got more units with same price. Hence over a period of time the fluctuations in market will get eliminated
How to maximize returns from SIP
Please see the below two scenarios on how an investor can maximize the returns. Invest your monthly savings at multiple dates in SIP and maximize your returns. Thought both the investors invested in same mutual funds
|
Scenario-1 |
|||
|---|---|---|---|
|
SIP |
Date of investment |
NAV |
Units purchased |
|
10000 |
1-Jun-12 |
100 |
100 |
|
0 |
15-Jun-12 |
95 |
0 |
|
10000 |
1-Jul-12 |
98 |
102 |
|
0 |
15-Jul-12 |
101 |
0 |
|
10000 |
1-Aug-12 |
105 |
95 |
|
0 |
15-Aug-12 |
99 |
0 |
|
10000 |
1-Sep-12 |
104 |
96 |
|
0 |
15-Sep-12 |
108 |
0 |
|
10000 |
1-Oct-12 |
110 |
91 |
|
0 |
15-Oct-12 |
110 |
0 |
|
50,000 |
|
Total units |
484 |
|
|
|
NAV at end of period |
110 |
|
|
|
Market value |
53,278 |
|
|
|
Actual investment |
50,000 |
|
|
|
Profit |
3,278 |
|
Scenario-2 |
|||
|
SIP |
Date of investment |
NAV |
Units purchased |
|
5000 |
1-Jun-12 |
100 |
50 |
|
5000 |
15-Jun-12 |
95 |
53 |
|
5000 |
1-Jul-12 |
98 |
51 |
|
5000 |
15-Jul-12 |
101 |
50 |
|
5000 |
1-Aug-12 |
105 |
48 |
|
5000 |
15-Aug-12 |
99 |
51 |
|
5000 |
1-Sep-12 |
104 |
48 |
|
5000 |
15-Sep-12 |
108 |
46 |
|
5000 |
1-Oct-12 |
110 |
45 |
|
5000 |
15-Oct-12 |
110 |
45 |
|
50000 |
|
Total units |
487 |
|
|
|
NAV at end of period |
110 |
|
|
|
Market value |
53,522 |
|
|
|
Actual investment |
50,000 |
|
|
|
Profit |
3,522 |
If you observe Scenario no.2 gives more turns comparing to Scenario-1. Thought for a 5 months period the returns show only 10% more, how if you are investing higher amounts or investing for longer terms, just imagine how your returns would be higher.
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Suresh
Myinvestmentideas.com
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Dear Mr Suresh,
I have Rs 2.5 Lakh and I want to invest it in lumsum along with this I want to invest in SIP Rs 10,000 per month. I have Term plan with Aviva ( Rs 50 Lakh) and 1 Lakh Mediclaim Plicy from New India Insurance for me and my family. My annual earnings are Rs 3.5 Lakh.
Kindly give your expert opnion on my investment