Why SIP make sense as Investment Tool ?

What is SIP ?

SIP-Systematic Investment Plan is a method of investing a fixed sum, that is paid regularly, in a mutual fund. This method of investment is very similar to that of RD's (Recuring Deposits) of old fashion of investment.

A SIP basically allows you to buy units on a given date each and every month. Like in the RD scheme you have to deposit a certain amount each month ;In SIP you will have to follow the same process. You have to decide a certain amount to be deposited each month and the mutual fund in which you want to invest.

How SIP works ?

Mutual Fund is actually a collected fund from n number of investors who want to invest in the MF's for high ROI. These investors are mutually agreed upon all the terms and conditions of the market risk. Suppose you have taken a SIP of XYZ Company then XYZ company appoints a fund manager who then manages all the fund and invest it in the market according to the market conditions for the better returns. Fund manager is a person who is having the sound knowledge of market research who then take all the calls for the share market investment of all the fund he/she has.The profits & surpluses generated from the investment are ultimately of the investors i.e. the SIP investors like you so, are provided in proportion to their investments.

SIP Calculator

Let us understand this with an example:
Assume you were investing Rs 2,500 per month in HDFC Equity fund (growth option) from September 2010 onwards. The investment was made on the 1st of every month and the tenure of the SIP was september 2010 to November 2011. This means a stream of 15 payments of Rs 2,500.
The last SIP was made on 1 november 2011 and all the units were redeemed on the same day. The exit value of the investment is Rs 46,004. Now, we need to look for a discount rate that will equate the present value of Rs 46,004 (cash inflow) and the present value of stream of SIPs, that is Rs 2,500 (cash outflows). Using IRR, we get the return as 2.85% per month or 34.25% annualised return.
Advantages:
1.There is no need to time the markets as you invest at predetermined intervals.
2.A Systematic Investment Plan renders to you the power of compounding, especially if you begin your SIP early in life.
3.SIPs inculcate the savings habit in investors.
4.It is a hassle-free mode of investment.

Note : Mutual fund investments are subject to market risks. Please read the Scheme Information Document and Statement of Additional Information carefully before investing.

This Article helps you out to understand the systematic investment plan basics. It contains a brief introduction about the SIP. Hope this article may help you in understanding the Systematic Investment plans for future.