Systematic Investment Plan (SIP)

A Systematic Investment Plan (SIP) is a vehicle offered by mutual funds to help you save regularly. It is just like a recurring deposit with the post office or bank where you put in a small amount every month. The difference here is that the amount is invested in a mutual fund. (Source)

SIP’s have been in existence since quite some time. The main benefits of SIP’s are :

Mutual Fund investments are managed by qualified and experienced professionals who have the expertise of investment techniques, backed by dedicated investment research team.
SIPs make the volatility in the market work in your favour. Since a fixed amount is invested more units are purchased when a schemes NAV is low and fewer units when the NAV is high. As a result, over a period of time these market fluctuations are generally averaged. Thus the average cost of your investment is often reduced. This is the Power of Compounding!
Since you invest regularly, it makes you disciplined in your savings, which leads to wealth accumulation.
More over it is convenient and hassle free as the amount is withdrawn from the bank via. ECS or through post dated cheque.

Investing in SIPs is also known as Rupee cost averaging. The advantage of rupee cost averaging is that the Net asset value (NAV) is averaged out, as the investor will be entering the fund at different NAVs, which may be higher or lower depending on the market condition.

Example how SIP actually works :

Lets take the example of Raj : He has started investing in SIP every month since he issued the first cheque on 1st June 2010.

Investment in fund ‘X’ of Mr. Raj

Period	Investment(Rs)	NAV(Rs per unit)	Units allocated
1st July ’10	1000.0	100	10
1st Aug ’10	1000.0	130	7.7
1st Sept ’10	1000.0	110	9.09
1st Oct ’10	1000.0	95	10.52
1st Nov’ 10	1000.0	75	13.34
Total	5000		50.65

*Note: In this example it is assumed that Raj does not change his SIP structure and also does not redeem the units!

Actual average NAV (Rs.) = Rs 102 per unit
NAV for Raj = Rs 98.71/- (5000/50.65)

You can conclude for the table how the Rupee Cost Advantage has worked for Raj. The actual current price of the NAV is Rs 102/- which costs Raj Rs 98.71/-

If the markets keep moving up this may or may not be the case but SIP is surely the best way to invest in Mutual Funds. The other way to invest in Mutual Fund is investing a Lumpsum amount.

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