How to use SIP or Systematic Investment Plan :An Example

The stock markets, not only local but global as well, are seeing a lot of volatility. Huge see-saws are observed on daily basis – within a matter of hours, the markets go up by upto 10% and then collapse by more than 12% the very next day. The question here is, what should be done in such a volatile situation.

That is where the SIP or Systematic Investment Plans can be helpful to you. In this article, we will discuss the following: How SIP or Systematic Investment Plans work, An example of SIP or Systematic Investment Plans, What are the risks associated with SIP or Systematic Investment Plans and What care should be taken while investing through SIP or Systematic Investment Plans

Let’s begin with the basics - SIP or Systematic Investment Plans are part of some of the investment techniques which aim at averaging out your investment value over a given period of time, with a regular investment in small amounts at regular periods of time.

Let’s get it more clear with an example:
Let’s take some realistic historical values of near future and some realistic stock index prices to see how things work in SIP or Systematic Investment Plans. Below, we present a table which takes the value of Sensex on 2nd date of every month for the last 10 months. Let’s say we start our investment on 2nd December when the NAV value was at 100. So the following table displays how our investment at the end of every month will look like.

At the bottom of the table, we also calculate the average value per unit that we gain at the end of the 10 month long period.

Date	Sensex Levels	NAV(Rs.)	Amount (Rs.)	Units
02-Dec	20,044	100	10,000	100
02-Jan	20,926	104	10,000	96
02-Feb	19,080	95	10,000	105
02-Mar	17,053	85	10,000	118
02-Apr	16,105	80	10,000	124
02-May	17,996	90	10,000	111
02-Jun	16,425	82	10,000	122
02-Jul	13,972	70	10,000	143
02-Aug	14,906	74	10,000	134
02-Sep	15,388	77	10,000	130
Total			100,000	1,184
Average Cost per unit				84.4

This value comes out to be 84.4.

Now compare this value to the various factors in the following way:

• You invested a total of 100,000 during this 10 month period. If you had made this investment as a one time investment at the beginning itself, buying the units of any Sensex based mutual fund at Rs. 100, then you would have been in a big 23% loss. The closing NAV price is 77. Hence, your loss would have been 23%.

• Now, since your followed the SIP or Systematic Investment Plan technique, your investment value is relatively safe. The average price per unit comes to 84.4, which means your loss is only 15.6% on an average. That is what the advantage of SIP or Systematic Investment Plans

• However, nothing in this world comes for free, What we have discussed above is a loss making scenario where the index went down from 20,000 to 15,388 or around 23%. What if the index went up by 23%? In that case, you will not get the full 23% profit, as the SIP or Systematic Investment Plan technique would again average out your profits. So that is the risk with SIP or Systematic Investment Plans

What’s the best way to follow for investment?
No one other than you yourself can answer that question. First identify your investment goals and then go for an investment plan. Here are a few points that can help:

• Ascertain your investment horizon.
• Decide on the periodicity of investment.
• Determine the amount you can comfortably invest in a SIP periodically.
• Pick a scheme according to your risk profile.
• Invest for the long term