?By Smit Doshi.
A SIP(Systematic Investment Plans) is a plan, wherein a fixed amount of money is debited by the investors in bank accounts periodically and invested in a specified mutual fund. The investor is allocated a number of units according to the current Net asset value. Every time a sum is invested, more units are added to the investors account.
Nowadays it is observed that there has been a rise in number of systematic investment plans by the investors. The following may be the reasons for the following:
1.Comparatively safer investments:
As mentioned above, SIP are periodic investment by the investor, it serves as a way of saving for the investor. The company which collects money from investor invests after doing proper analysis in safe plans where they can earn reasonable amount of return to retain there customers.
2.Reasonable return
Generally the investment made in SIP give a reasonable return due to the reason that it is generally for long term and when the units are purchased for lower amount then more amount of units are received and when they are sold after some period(generally after years),huge sum is received and are exempted from taxation. Only a nominal fees are deducted.
3. Tackling inflation
Inflation makes it difficult for an individual to estimate the amount of expenditure to be incurred after a certain number of years. A person cannot just assume the expenditure at present would remain the same after years. This is not possible as inflation rates change everyday. Thus to meet the huge future expenditure, a safe and reliable way would be to invest periodically a small amount in a SIP and get the required amount and even sometimes more than that at the end of the maturity period and thus it would help us in meeting our future expenditure. Let us take an example, suppose a sum of Rs.10lakh is the present amount of the expenditure that is to be incurred in future, it would not be correct to say that the same amount would be required after 10 years due to inflation. Thus to meet future huge expenditure SIP would be a good option to choose.
4.Averaging your purchase cost:
Stock prices changes within a fraction of a second and thus the price at which buyers wants to buy the stock may change. Buyers generally purchase shares at low price and sell at high prices. Thus investing in SIP would do the same. The company would invest our money in shares and would give us a reasonable return and thus if any shares are purchased at high prices would be averaged and thus the overall cost would be averaged and the per share price would come down. The table below would help you to understand how investing through SIP averages out your cost price. For the illustration we have assumed that the NAV price has fluctuated between Rs 97 and 105. The amount invested every month is Rs 2,000. The average cost price is usually low over a long period.