SIP - Systematic Investment Plan
What is SIP?
Systematic Investment Plan (also known as automatic investment plan) is a process by which instead of investing in one go, investment is made in installments. The installments may be monthly or quarterly and it may be through post dated cheques or ECS (electronic clearing scheme).
It is an easy way of planning investments, it is always easy to invest a small amount every month than to pull out a big sum of money. Then there are benefits of averaging the cost price of the investment. It inculcates a habit of investing. Early you start more returns you can have on your investment portfolio.
The average cost factor
Now let us analyze the purchase price of the investment in three scenarios, one when the markets are going up, two when the markets are going down and three when the markets are volatile and fluctuating.
CASE I (The Stock Markets are going up)
| MONTH | NAV | SIP | UNITS ALLOTTED |
| April | 10 | 2000 | 200.000 |
| May | 11 | 2000 | 181.818 |
| June | 11.5 | 2000 | 173.913 |
| July | 12 | 2000 | 166.667 |
| August | 12.5 | 2000 | 160.000 |
| September | 13 | 2000 | 153.846 |
| October | 13.5 | 2000 | 148.148 |
| November | 14 | 2000 | 142.857 |
| December | 14.5 | 2000 | 137.931 |
| January | 15 | 2000 | 133.333 |
| February | 15.5 | 2000 | 129.032 |
| March | 16 | 2000 | 125.000 |
| Total | 24000 | 1852.546 | |
| Average Price | 12.955 | ||
| Value at the end of the period (Total Units X Last NAV) |
29640.735 | ||
CASE II (The Stock Markets are going down)
| MONTH | NAV | SIP | UNITS ALLOTTED |
| April | 10 | 2000 | 200.000 |
| May | 10 | 2000 | 200.000 |
| June | 9.75 | 2000 | 205.128 |
| July | 9.5 | 2000 | 210.526 |
| August | 9 | 2000 | 222.222 |
| September | 8.5 | 2000 | 235.294 |
| October | 8.5 | 2000 | 235.294 |
| November | 8 | 2000 | 250.000 |
| December | 7.5 | 2000 | 266.667 |
| January | 7.25 | 2000 | 275.862 |
| February | 7 | 2000 | 285.714 |
| March | 7 | 2000 | 285.714 |
| Total | 24000 | 2872.422 | |
| Average Price | 8.355 | ||
| Value at the end of the period (Total Units X Last NAV) |
20106.956 | ||
CASE III (The Stock Markets are fluctuating)
| MONTH | NAV | SIP | UNITS ALLOTTED |
| April | 10 | 2000 | 200.000 |
| May | 9.5 | 2000 | 210.526 |
| June | 9.25 | 2000 | 216.216 |
| July | 8.5 | 2000 | 235.294 |
| August | 7.75 | 2000 | 258.065 |
| September | 9 | 2000 | 222.222 |
| October | 10.25 | 2000 | 195.122 |
| November | 11 | 2000 | 181.818 |
| December | 11.5 | 2000 | 173.913 |
| January | 12.5 | 2000 | 160.000 |
| February | 11 | 2000 | 181.818 |
| March | 10.5 | 2000 | 190.476 |
| Total | 24000 | 2425.471 | |
| Average Price | 9.895 | ||
| Value at the end of the period (Total Units X Last NAV) |
25467.445 | ||
From the above illustrations it can be safely concluded that the systematic investment plan helps in averaging the purchase price of the investment resulting in hedging against the risks of unpredictable market behavior. In case II where the markets are coming down you would have noticed that the total loss sustained is much less than the loss sustained by the scheme during the period of investment, besides this we can not overlook the fact that we have got the maximum number of units in this case and markets being cyclic, whenever they will bounce back, our returns will multiply with the number of units held.
But generally, the markets are fluctuating and they are seldom seen to be going in one direction, therefore in an SIP we always stand to gain due to averaging the purchase price and there is always an ease of paying in installments.
Zero entry loads
SIPs generally have no entry loads, but they have exit loads if you exit before a specified time period. If you are a long term investor, and you are not willing to redeem your investments before the specified time, then you also benefit from the zero entry loads. Equity based mutual fund schemes generally have an entry load of 2.25%, which can be saved in an SIP.
Downside of SIPs
However, there are some disadvantages of SIP too. In an ongoing bull market you would not benefit from an SIP and the returns would be lesser than in case you would have invested in one go in the beginning as seen in case I above. However history shows that the markets generally do not tend to go in one direction. They would go up and down. Secondly the SIP would invest your money on specific dates, for which you have given the mandate. It may be possible that on that particular day, because of some good news or euphoria the markets close very high and you get units at very high NAV and which is offset on the next day or next few trading sessions. Or you might some times think that on a bad day when market sheds 2-3% or when there are small corrections, you would have bought some cheap investments, but your SIP will trigger on the specific day.
Still I would maintain that no one is able to time the markets, and the advantages of SIP weigh much heavy on its disadvantages.