24 August 2017

Systematic Investment Plan - SIP



What is SIP?

Most of us know SIP – Systematic Investment Plan.
In simple words, it is an Investment in EMI form. Only difference between SIP and Loan EMI is that in a loan, you borrow a Lump sum amount and repay it in EMI (Equated Monthly Instalments). In a SIP, you pay EMIs and accumulate a Lump sum, which can be used towards meeting a Financial Goal or Objective.

What is the advantage of SIP?

In simple terms, rupee cost averaging. Let’s look at an Example:
I buy Onions worth Rs 100 every month-my amount spent on onions is fixed. However, the rate of Onions could vary. Let us say it is Rs.10, 15, 20, 25 and 10 for 5 months.


Amount
Rate of Onions
Qty of Onions



100
10
10



100
15
6.666666667



100
20
5



100
25
4



100
10
10








Total
500

35.66666667








Average Price = 500/35.66667=Rs 14
Mathematical Average of Onion Price=(10+15+20+25+10)/5=16

So, though the average price of Onions over the 5 months period was Rs.16/kg, my average purchase price was Rs 14.

When does a SIP work Best?
A SIP works best when the market fluctuates in the short term and rises upwards in the long-term (2014-2017)

When Market rises upwards

SIP AMOUNT
NAV
UNITS
1
10000
10.00
1000.00
2
10000
11.00
909.09
3
10000
11.00
909.09
4
10000
12.00
833.33
5
10000
11.75
851.06
6
10000
12.25
816.33
7
10000
13.00
769.23
8
10000
14.00
714.29
9
10000
15.00
666.67
10
10000
14.75
677.97
11
10000
15.00
666.67
12
10000
16.00
625.00
 TOTAL
120000

9438.72



Total invested amount in 12 months is Rs. 1,20,000.00 and Market value is Rs. 1,51,020.00
When does a SIP fail?
A SIP fails when the market fluctuates in the short term and falls in the long term (2010-13)
When Market falls

SIP AMOUNT
NAV
UNITS
1
10000
16.00
625.00
2
10000
15.00
666.67
3
10000
14.75
677.97
4
10000
15.00
666.67
5
10000
14.00
714.29
6
10000
13.00
769.23
7
10000
12.25
816.33
8
10000
11.75
851.06
9
10000
12.00
833.33
10
10000
11.00
909.09
11
10000
11.00
909.09
12
10000
10.00
1000.00

120000

9438.72

Total invested amount in 12 months is Rs. 1,20,000.00 and Market value is Rs. 94,387.00

SIP is best when one has a Long Term Goal like a child’s education/marriage or retirement planning and has a regular source of steady income.

These days you get Flexible SIPs where you can choose your SIP date, vary your SIP amounts and so on. Also, you can opt for a Step-up where your SIP amount increases every year. Say, you start with a SIP amount of Rs 2000 with a step-up of Rs 500 every year. The 1st year, your SIP amount will be 2000, next year 2500, year after 3000 and so on.


Prasad wagle 
Financial Advisor