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SYSTEMATIC INVESTMENT PLAN – SIP

A Systematic Investment Plan (SIP) is a method for investing money at regular intervals into the fund of the investors' choice over a defined time frame with an aim to convert small savings into larger savings over a period of time.

Human Life Cycle

  • Human life is long and complex and passes through many stages. Each stage has its own challenges and opportunities.
  • One needs to plan for one's aspirations such as weddings, childrens' education, post retirement years and so on from an early stage.
  • How one manages one’s income in their productive years has a similar effect on one’s unproductive years as well.
  • An important question that arises is – ‘Will saving alone meet all present and future expenses?’
The answer – No! Introducing Inflation – The Invisible Killer

Rising expenses and falling value of money are income punctures that everyone faces. Also, lifestyle inflation has lead to many luxuries becoming necessities over the last few years; a trend which will continue even in the future. A mobile phone which was not necessary 10 years ago has become essential now.

So, how does one beat inflation and meet one’s future goals? All it requires is a simple rearrangement of one’s priorities



Simple Steps to Wealth Creation:

1) Start early – Be the first to take the first step
Consider the following scenarios where different investors start investing at different age levels and invest ` 2,000 per month till they are 60 years old. The person who started investing at the age of 25 years stands with a higher benefit as he has started early and can benefit from the power of compounding. Even a higher investment amount may not compensate for the growth potential of starting early.
2) Invest in the right asset class – Risk return balance to optimize growth
For the past 18 years, inflation has been on an average at 6.43% on CAGR basis; as investors should always look at an asset class which has the potential to generate positive inflation adjusted returns. Historically on analysis for the past 25 years, equity as an asset class has the potential to beat inflation and generate positive returns post tax and inflation adjusted returns. (Refer to the chart)
3) Investing with a plan – Consistent and continuous investment
Systematic Investment Plans (SIPs) in mutual funds have long been considered one of the better ways for the common man to invest in mutual funds.
What is a Systematic Investment Plan?
SIP is a strategy whereby you commit to invest a fixed amount of money at specified intervals of time into the fund of your choice. Since the amount is invested regularly and is constant, you get more units in the falling market and fewer units when the price is high. It helps you smoothen out market fluctuations, making the investment a low cost over a period of time. This strategy in investing is called ‘Rupee Cost Averaging’.
Benefits of a Systematic Investment Plan
Allows you to buy more units as the market moves down and less units as the market moves up.
Reduces risk by spreading investments over a longer period of time at various levels of the market.
Reduces the cost of investment in fluctuating markets.
Ensures consistent continuous implementation of these strategies.
Rupee Cost Averaging

Rupee cost averaging is an effective investment strategy that eliminates the need to time the markets. All you have to do is invest a fixed, pre – decided amount of money on a regular basis over a long period of time. Since the amount invested per month is constant, you buy more units when the price is low and fewer units when the price is high. The table on the right clearly illustrates the concept.

As mentioned above, the average price for the investment is `9.97 and 1003 units would have been purchased. However, in the event of the lump sum purchases the price of investment would have been `10 with only 1000 units purchased. The objective of rupee cost averaging is to invest across market cycles, thus bringing the cost price down. This contributes to the returns of the investors.
SMART INVESTOR PLAN – Practical Report

The chart below shows the performance of `2,000 SIP in BSE Sensex for different time periods. The chart clearly shows how following the Smart Investment Plan helps reap benefits over a longer period of time.



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Mutual fund investments are subject to market risks, read all scheme related documents carefully.