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Should you invest in SIPs? Read on to find out

Last updated on: March 28, 2011 08:11 IST

Benjamin Graham, the father of value investing, has termed dollar cost averaging as one of the top 3 tenets of investments for a defensive investor.

Dollar cost averaging is nothing but the systematic investment plan.

Systematic investment plan is a scheme which allows investors to invest in a mutual fund a certain amount of money over a period.

For example, investors can invest Rs 5000 in a mutual fund every month. 

Advantage of SIP

Systematic investment plan has many advantages over one time investment. Some of the advantages are mentioned below.

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Should you invest in SIPs? Read on to find out

Last updated on: March 28, 2011 08:11 IST

Price averaging

SIP allows you to average the price over long period so that the impact of changing prices of mutual fund is minimised.

You can buy more units when the prices drop and buy less when the prices move up. The advantage is that you do not have to worry about price movement.

Discipline: SIP instills in you a sense of discipline towards investment and savings.

Low base requirement: You can start SIP with a much lower investment. Many banks and financial institutions allow investment via SIP as low as Rs 500 a month.

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Should you invest in SIPs? Read on to find out

Last updated on: March 28, 2011 08:11 IST

Example:

Let's see how SIP works.  The table below shows the monthly data of a mutual fund by Birla Sun Life.

The fund is Birla Sun Life Small & Midcap Fund GROWTH. The NAV is highest for the month.

Look at the column total investment and investment at current price.

You can clearly see that total investment in the case of SIP is almost always lesser than the investment needed to buy the same accumulated quantity at current price.

This may not be true when the prices keep going down continuously.

We know, however, that prices of mutual fund or stock do not go up or down straight.

The short term ups and downs usually happen one after the other.

SIP moderates the impact of these short term ups and downs of the mutual fund prices.

Month

MF price (NAV)

Monthly Investment

No of Units

Total unit

Total Investment

Average Price

Investment at current price

Dec-2009

10.94 Bottom of Form

5000

457

457

5000

10.94

5000Bottom of Form

Top of Form

Jan-2010Bottom of Form

11.58

5000

432

889

10000

11.25

10292Top of Form

Feb-2010

10.90

5000

459

1348

15000

11.13

14687

Top of Form

Mar-2010Bottom of Form

11.46

5000

436

1784

20000

11.21

20448Top of Form

Apr-2010

12.33

5000

406

2190

25000

11.42

26991

May-2010

12.07 Bottom of Form

5000

414

2604

30000

11.52

31437Bottom of Form

Jun - 2010Bottom of Form

12.15

5000

411

3015

35000

11.61

36639Top of Form

Jul-2010

12.78

5000

391

3406

40000

11.74

43542

Aug-2010

13.35 Bottom of Form

5000

374

3781

45000

11.90

50488Bottom of Form

Sep-2010

13.69

5000

365

4146

50000

12.06

56761

Oct-2010

14.14

5000

354

4500

55000

12.22

63640

Nov-2010

14.35

5000

348

4848

60000

12.38

69569

Dec-2010

13.52

5000

370

5218

65000

12.46

70560

Click NEXT to read further. . .

Should you invest in SIPs? Read on to find out

Last updated on: March 28, 2011 08:11 IST

How to proceed with SIP

You can ask your bank to allow a mutual fund of your choice debit a certain amount towards investment every month.

You have to specify the amount, date of the month when money will be invested, and duration of SIP.

For example, if you choose to invest Rs 3000, 10th of every month, for 3 years, the mutual fund will keep debiting Rs 3000 from your account towards investment in the fund for 36 months.

You can also follow this on your own by investing Rs 3000 every month. However you need to be very disciplined with your budget to achieve this.

Click NEXT to read further. . .

Should you invest in SIPs? Read on to find out

Last updated on: March 28, 2011 08:11 IST

Variants of SIP:  Daily, Monthly

Daily SIP scheme requires investors to invest daily while monthly SIP allows investors to invest monthly.

At first glance, daily SIP seems to take care of volatility better than monthly SIP, but there is no empirical evidence that has shown significant difference in returns.

Click NEXT to read further. . .

Should you invest in SIPs? Read on to find out

Last updated on: March 28, 2011 08:11 IST

Key aspects

Daily SIP is not allowed by many mutual funds and hence your options are limited. Monthly SIP options are available in almost all mutual funds.

The most important aspect is to do with our habits.

We are used to planning for a month.

It is more convenient for us to see income, investment, and expenses in a monthly timeframe and hence we can plan better towards a monthly SIP.

The final aspect is calculation of taxes. Daily SIP makes tax calculation more complex as you have to evaluate the capital gain by comparing the selling price with everyday price for the last one year.


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