What is the SIP (Systematic Investment Plan)?
SIP is a method of investing in a disciplined manner. For example, If you have a home loan, you set up an auto-debit on your account so the money you owe gets deducted from your account by the bank on the 1st (or a date of your choice) of every month. You do not monitor it. The bank auto-debits. Similar is the case with SIP.
How SIP works?
The investment amount for SIP can be as low as Rs.500 and you may choose how regularly you want to invest- weekly, monthly, quarterly, or annually. Just like how you would pay your home loan on a specific date, you would also invest money in the stock market on a certain date.
For example, if you set up your SIP date as the 5th of every month, the money gets debited and invested on the 5th of every month. When you invest in a mutual fund or any investment on a certain day every month, you are doing a SIP.
Rs. 5000 – How does it work on SIP?
Let us assume you want to invest Rs. 5,000 on the 5th of every month. You set it up so you will be buying the NIFTY 50 on the 5th of every month. Let’s say, you start in January.
|Date||Amount Invested (Rs)||Stock||Price per share (Rs)||No. of shares bought|
|Jan 5, 2019||5000||NIFTY 50||50||100|
|Feb 5, 2019||5000||NIFTY 50||40||125|
|Mar 5, 2019||5000||NIFTY 50||45||111.11|
|Apr 5, 2019||5000||NIFTY 50||30||166.66|
|May 5, 2019||5000||NIFTY 50||55||90.90|
|Jun 5,2019||5000||NIFTY 50||48||104.16|
|Jul 5, 2019||5000||NIFTY 50||60||83.33|
|Aug 5, 2019||5000||NIFTY 50||40||125|
|Sep 5, 2019||5000||NIFTY 50||55||90.90|
|Oct 5, 2019||5000||NIFTY 50||50||100|
|Nov 5,2019||5000||NIFTY 50||35||142.85|
|Dec 5, 2019||5000||NIFTY 50||30||166.66|
The total investment is Rs.60,000. The total number of shares is 1406.57 at an average price per share of Rs.42.65. Instead of investing Rs. 60,000 (12 * Rs. 5000) you distribute it over 12 months. The rupee cost averaging helps you stay immune to the market ups and downs.
Why should you have a SIP?
Rupee Cost Averaging
Instead of investing Rs. 60,000 and buying NIFTY 50 (the equivalent would be an S&P 500 in the United States) which may be trading at a particular price, you keep buying it every month at varying prices as per the market cycle. This way you get to buy on the lows and highs and the cost averages out. In the table above, you will see that your average price of buying per share over a period of 12 months is Rs.42.65. This is also called Rupee Cost Averaging. When you are investing in SIP, you need not worry about market fluctuations as the cost automatically gets averaged out.
With SIP you can choose to invest at regular intervals which makes your investment burden-free. A stipulated amount (of your choice) would be auto-debited from your account at regular intervals which enables financial freedom for your future while giving you good control over your expenditure.