SIP (Systematic Investment Plan)

Very often we find ourselves as saying – "I don’t have time to invest," or "I can't afford to put away a lot at this point." These are all excuses! We bring to you the concept of SIP – that is a Systematic Investment Plan – which allows you to periodically invest small fixed amounts, which grow at a compounded rate into a substantial amount at the end of your long term plan. An SIP is a service offered by mutual funds and provides you, the investor, with an option of committing a small quantity of money regularly towards investing as opposed to a lump sum investment. Simple? Well, we're just getting started!

Why SIP is good

Now that we are about to lay the foundation for regular investing through the means of SIPs, let’s review why this is a good option to start with.

A systematic investment option such as the SIP enables you to build wealth over a long term horizon. Generally, investors look to time the market. This practice is futile and more often than not, investors buy when prices are rising and sell when the prices are depressed. This is in stark contrast to the sound principle of equity investing – Buy when the price is low, sell when it is high. So how does SIP help in this regard? Since the amount invested each month is fixed, what changes is the net asset value (NAV). So, when the prices are down, the NAV dips which means that you get allotted more units of the fund. Similarly, when prices rise, you get allotted more units, plus the returns on your earlier units, acquired at lost cost¸ rise. This does away with the risky business of timing the markets and ensures that you are investing in a disciplined manner.

So you save and invest in an SIP, but do you know why and how an SIP is good for you, especially as a woman investor? First let’s tell you why an SIP works in your favour. Most women save and spend in equal amounts (at least we hope they do!), though there are times when you find your hand reaching more towards your savings pocket to compensate for the shortfall in the spending account. A sure shot way to ensure the funds stay separate is to keep them in two different accounts. And then introduce the concept of SIP to your savings account! A systematic investment plan will enable you to maintain your savings in a disciplined manner and will also help you make money over the long term.

How SIP works

A systematic investment plan is not much different than the savings option of a recurring deposit account with a post office or a bank, except that these small monthly amounts are invested into a mutual fund. The SIP option is available with all types of funds like equity, income or gilt and works in your favour as the NAV (Net Asset Value) is averaged out as opposed to a one time buy. As you will be investing at regular intervals, the NAV may be higher or lower depending on market fluctuations.

	Person A			Person B
Month	NAV*	Amount	Units	Amount	Units
Jan-09	8.512	1,000	117.4812	12,000	1,409.774
Feb-09	9.591	1,000	104.2644
Mar-09	8.451	1,000	118.3292
Apr-09	8.321	1,000	120.1779
May-09	8.269	1,000	120.9336
Jun-09	9.421	1,000	106.1458
Jul-09	9.478	1,000	105.5075
Aug-09	7.598	1,000	131.6136
Sep-09	8.471	1,000	118.0498
Oct-09	7.987	1,000	125.2035
Nov-09	6.958	1,000	143.7195
Dec-09	7.524	1,000	132.908
Total			1,444.334		1,409.774

* These NAVs are assumed

The table above clearly shows how your cost of purchasing the units of any fund comes down and how a sense of discipline is instilled while investing even when there are swings in the NAV due to volatility in the market.

10 Mistakes Investors Make and How to Avoid Them