POSTED BY April 21, 2008 COMMENTS (76)ON
SIP is a way of investing in Mutual Funds where you pay a fixed amount each month for a fixed tenure.
Like If you take an SIP of 5,000 for 1 year on Jan 1, 2008, you will be paying Rs 5,000 per month for next 12 months.
Please understand that its not a financial instrument, but a way of investing in mutual funds, some people confuse SIP with PPF, NSC, and mutual funds, they think they can invest in “SIP”, its just a mode of investment.
Investment through SIP must be done only when markets are uncertain or very volatile, when you don’t know which side they are headed to ..
SIP will be beneficial only if markets really are volatile or going down after you invested. If it happens that markets turns bullish and starts going up, in that case SIP will not be beneficial and will give less return compared to lumpsum investment in start.
SIP is a simple concept and hence very powerful, lets see some reasons why its worth investing through SIP
More convenient for average person on wallet
Its more easy for a person to invest in small amount every month, rather than a lump sum amount. Investing through SIP is lighter on wallet. Its easy to pay Rs 5,000 per month for 1 years, rather than investing 60,000 at a same time.
It brings your average cost price for unit down (in volatile market)
The biggest advantage of SIP is this part, There is a concept of rupee-cost averaging, In SIP you buy less when market and NAV are UP and you get more units when they are low. When this happens, the average cost of per unit is lower.
Lets take an example of “Ajay” who invests 1,000 per month through SIP starting Jan 2, 2007.
How SIP helps in this case ? See the result below :
Makes you a disciplined Investor
The other advantage of SIP is that it makes you a disciplined investor. Once you start SIP, each month you have to contribute certain money in mutual fund and that habit is cultivated.
It will not work in bullish markets or when market goes up over time
When market goes up and keeps growing over time, the units bought every time will be at high price then the previous one, which will ultimately bring the average cost up , compared to the lump sum investment at the start.
In case of tax saving fund, the lock in period gets extended for every investment.
Tax saver mutual funds lock your money for 3 yrs, When you invest through SIP, each of your investment is locked separately for 3 yrs from the date of investment. So if you pay your first installment on Jan 2007, it will locked till Jan 1 2010, then the installment paid on Feb 1, 2007 will be locked till Feb 1, 2010 and like this each installment will be locked with the gap of 1 month.
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