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 1^st year, your SIP amount will be 2000, next year 2500, year after 3000 and so on.

Prasad wagle 

Financial Advisor