How (SIP) Systematic Investment Plan Works

What is the (SIP) Systematic  Investment Plan?

A systematic Investment Plan or SIP is the smart & hassle free investment way for investing in any company shares or indirectly you can say mutual Fund. SIP allows invest in the predetermined interval in the Specific sector, company, and in different funds at the regular time (weekly, monthly, and quarterly).  It’s is the best way of investment in the stock market who don’t know about the share market & mutual fund.

How does it work?

SIP is the flexible pre-determined investment plan. SIP Amount get debited from your account on the pre-determined date that goes to the specific mutual fund scheme in that you want to invest that allocate you the units at specific NAV (Net Asset Value) rate.

Every time (Weekly, monthly, and quarterly) you invest at a different rate in the Mutual fund at market rate which prevailing in the market & that add to your earlier purchasing. Hence every unit bought at different rates and investor benefit from the money cost averaging and power of compounding.

Invest (Monthly) Invested Amount NAV Rate Unit Purchased
April 2000 118 16.95
May 2000 120 16.67
June 2000 140 14.29
July 2000 115 17.39
August 2000 145 13.79
Sep 2000 135 14.81
Total 12000   93.9

 

 

 

 

 

 

 

Now, you purchased the different unit at different rate at fixed investment

  • NAV Rate – Market-Based
  • Unit Purchased – investment Amount / NAV = Unit Purchased
  • Investment Amount – Monthly deducted amount from your account.

So you invested 2000 INR/Dollar in six months that creates 93.9 Units for you. Now sell the Units at high rate whenever the mutual NAV is the High. Suppose you have sold the units at 140 NAV means you 13146/- got. It means you have invested 12000/- at the return you got 13146/-. You got the 9.55% return on your investment.

I hope you might basic clear that how SIP work in Mutual fund.

Cost Averaging

With ups –down of market remain skeptical about the best time to invest and find time to invest in the market. Cost averaging allows you to opt out of the guessing game because you are the regular investor, at less NAV fetch more units when the price of NAV is low and lesser when the price is high. So it allows you to achieve a lower average cost per unit & you can sell it at higher cost unit.

Power of compounding

The sooner you start investing the more time your money has to grow.

For Example – you started investment Rs.1,00,000 a month on your 40th birthday, in 20 years time you would have put 20,00,000  INR lakh aside if that invested money grew at the rate of 7% a year. It would become Rs. 5.24 Cr. When you reach 60

However, if you do investment 10years earlier, your Rs.1,00,000 each month would add up to Rs.3.60 Cr. Over 30 years. Assuming the same average rate of 7%, you have 12.2 Cr. on your 60th age. More than double the amount you will get if you have started 10 years ago.

Another benefit of SIP Investment.  

  • Disciplined saving
  • Convenience
  • Long terms gains
  • Tax benefit
  • Flexibility

SIP is the best way to invest in the mutual fund to unknown who don’t understand the mutual fund & share market. Laymen also can invest without understanding the market status & complexity.

 

 

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