| Briefly, the SIP works
something like this. If one were to invest in mutual funds, you would select a scheme and
buy into the scheme at its prevailing net asset value (NAV) or in case of a new scheme at
its face value. Under the SIP, however, you would stagger your investment over a period of
time. That is, instead of a lumpsum amount, you invest a pre-specified amount periodically
in mutual fund schemes that offer this option. The
number of units that accrue to you on each periodic investment are a function of the then
prevailing net asset value (NAV) of the scheme you have opted for. By using this
technique, SIPs make the volatility in the market work in your favour. More units are
purchased when a scheme's NAV is low and fewer units when the NAV is high. As a result,
even if the market is falling or rising, the average per unit cost price in a SIP will
always be less than the average per unit sale price.
Here’s a detailed look at how it works to your
advantage.
Let us suppose that you would like to invest Rs. 1,000
every month, in an equity fund using the SIP. The following table shows how your
investments would look in the two scenarios of fluctuating and rising market
Let us suppose that you would like to
invest Rs. 1,000 every quarter, in an equity fund using the SIP. The following table shows
how your investments would look in the two scenarios of fluctuating and rising market.
Month |
Amount
Invested (Rs.) |
Fluctuating Market
|
Rising Market |
Purchase Price
(Rs.) |
No. of Units
Purchased |
Purchase Price
(Rs.) |
No. of Units
Purchased |
Initial Investment |
1,000 |
10.00 |
100.00 |
10.00 |
100.00 |
1 |
1,000 |
8.20 |
121.95 |
10.50 |
95.24 |
2 |
1,000 |
7.40 |
135.14 |
11.00 |
90.91 |
3 |
1,000 |
6.10 |
163.93 |
11.50 |
86.96 |
4 |
1,000 |
5.40 |
185.19 |
12.00 |
83.33 |
5 |
1,000 |
6.00 |
166.67 |
12.40 |
80.65 |
6 |
1,000 |
8.20 |
121.95 |
12.90 |
77.52 |
7 |
1,000 |
9.25 |
108.11 |
13.35 |
74.91 |
8 |
1,000 |
10.00 |
100.00 |
14.00 |
71.43 |
9 |
1,000 |
11.25 |
88.89 |
14.50 |
68.97 |
10 |
1,000 |
13.40 |
74.63 |
15.00 |
66.67 |
11 |
1,000 |
14.40 |
69.44 |
15.50 |
64.52 |
TOTAL |
12,000 |
|
1,435.90 |
|
961.11 |
| Average Unit Cost |
(Rs. 12,000/1435.9) = Rs. 8.36 |
(Rs. 12,000/961.1) = Rs. 12.49 |
| Average Unit Price |
(Sum of Purchase price / 12) = Rs. 9.13 |
(Sum of Purchase price / 12) = Rs. 12.72 |
| Assumed NAV @ Q12 |
Rs. 14.90 |
Rs. 16.00 |
| Market Value |
(1435.9 units x Rs. 14.90) = Rs. 21,395 |
(961.11 units x Rs. 16.00) = Rs. 15,378 |
Therefore, the average unit cost is lower
than average unit price irrespective of market rising or fluctuating. This happens because
you get the advantage of buying more units when the market is low and averaging out the
purchase price.
Some points to consider before
deciding on a SIP
 Ascertain
your investment horizon.
Decide
on the periodicity of investment.
Determine
the amount you can comfortably invest in a SIP periodically.
Pick a
scheme according to your risk profile.
Invest
for long term. |