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Systematic Investment Plan (SIP) – A rupee a day, keeps worries away

This article describes how cost averaging can be achieved using MF SIPs. It also talks about the benefits of SIPs against cost averaging in stocks.

We have all heard that investing in stocks for the long term is a strategy that gives tremendous returns. (Please read “Stocks – The winning bet for the long term” for more). Even the strategy of Cost Averaging calls for regular investments. You only need to keep investing in a disciplined manner, and you would reap the benefits in the long term.

If only it was so simple!! Most of us lack the discipline to invest regularly – and therefore, most of us don’t make good profits from stocks!! The only way to make profit in stocks is through regular, disciplined investments for the long term – and that is hard to practice!

But there is a tool available that can make this really easy for you – and that is Systematic Investment Plans (SIPs) offered by Mutual Funds (MFs) for almost all of their schemes.

 

What is a Systematic Investment Plan (SIP)?

Systematic Investment Plan (SIP) is a method of investing in mutual fund schemes. Using this method, you can invest a fixed amount periodically (usually every month) for a predetermined period.

You need to decide the scheme in which you want to invest, and the amount you want to invest in the scheme every month. You also decide the time period for which you would want to invest (that is, how long you want to make investments).

Then, all you need to do is fill up a form and give post-dated cheques for this amount for the number of months you want to invest! (These days, you can also give Electronic Clearing Service (ECS) or Auto Debit instructions instead of post-dated cheques).

Every month, the mutual fund (MF) would deposit the cheque, and would issue you units at the prevailing Net Asset Value (NAV). Your investment every month remains the same, but depending on the prevailing NAV, the units issued would vary.

Number of Units issued = Your investment amount / Prevailing NAV

And this happens automatically – you don’t have to take any action every month! Isn’t that great? SIPs take away the most difficult part of investment – “discipline” – they do it for you!!

You just need to issue the post-dated cheques (or make alternate payment arrangements) once, and the MF house does all the hard work! Therefore, a Systematic Investment Plan is the best way to invest in stock markets through Mutual Funds (MFs). (Should you invest in stocks directly, or through MFs? Read “Direct investment in Stocks versus Mutual Funds (MFs)“)

 

Cost Averaging and Systematic Investment Plan (SIP)

Cost Averaging calls for fixed, regular investments. And SIPs do just that. They are just made for each other!

It is very difficult to make disciplined investments every month – which is required in Cost Averaging. SIPs do that, and they do it automatically! Therefore, Systematic Investment Plans (SIPs) are the best way to practice Cost Averaging.

 

Advantages of Systematic Investment Plans (SIPs)

Since SIPs offer a way to practice Cost Averaging, they also offer all the advantages of Cost Averaging (Please read “Cost Averaging” for a detailed explanation of these)

  1. Remove the element of timing the market from investing
  2. Reduce the average cost of acquisition

 

Other benefits

Apart from these, there are other great benefits:

  1. No Discipline needed: Choose the scheme, give the cheques, and you are done! You don’t need to remember anything – the MF does it for you!
  2. Compulsory Saving: Since you make a commitment to make a certain investment every month, it results in compulsory savings. If you are investing on your own every month, something might make you not invest during some months. But with SIPs, you end up investing (and thus, saving) every month.
  3. Very low monthly investment possible: SIPs can be started for amounts as small as Rs. 100 per month!! This limit is far lower than the limit for one time, lump sum investment in the MF schemes. So, whatever your capacity to invest, you can invest using SIPs.
  4. Favourable entry load: Some MF houses have favourable entry loads for SIPs – they either charge less entry load, or charge no entry load at all. This results in substantial savings in the long term (Please read “No entry load for Mutual Funds (MFs) – What does it mean for you?” for more on this)

 

A tip regarding SIPs

You can diversify using SIPs. Since the minimum investment required for SIPs is very low, you can split your amount between 2-3 good MF schemes. Thus, instead of investing Rs. 5000 every month in the SIP of just one scheme, you can probably invest Rs. 2500 in 2 different MF schemes. This way, you can diversify easily.

So, what are you waiting for? Go ahead, invest using SIPs, and reap the benefits of regular investments without any effort!

Happy Investing!

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