What is Systematic Investment Plan or SIP?

Systematic Investment Plan or SIP of mutual funds is a method of investing in the stock market
by buying mutual funds units  – you commit to invest an amount systematically over a period of
time instead of investing the money as a lump sum. It is not an investment avenue and  it can be
used only with mutual funds. By investing in the SIP way, you don’t care where the stock market
is going – up or low – you automatically buys more units of the mutual fund when the stock
market is low and less units when it is high. This averages out the cost of purchase – you buy
more units when the price is less and less units when the price is more. This concept is called
rupee cost averaging. Let us see with an example how this works.

Consider two investors who want to put in Rs 24,000/- into mutual funds and cash out at the end
of 12 months. The ordinary investor decides to put in his money just once in the beginning and
cash out at the end of the 12th month. The smart investor, on the other hand, decides to invest
systematically the Rs 24,000/- he has. He decides to put in Rs 2,000/- each month into the mutual
fund over the next 12 months. Now the NAV of the mutual fund is going to vary each month in
the year of  consideration. Let us take a hypothetical varying NAV and check the results.

At the end of 12 months, the ordinary investor has 2400 units and since the NAV of the mutual
fund is 11 at the end of the 12th month, his current market value will be Rs 26,400. However, the
smart investor has more number of units with him – 2538.91 and at an NAV of 11, his current
market value works out to be Rs 27,928.91. Look closely at the varying NAV of the mutual fund
and how the units purchased are more when the NAV is less and how the units are less when the
NAV is more. The smart investor has more money and has taken less risk to achieve it !
Advantages of Systematic Investment Plan or SIP
Following are some of the advantages of Systematic Investment Plan or SIP.

 They enforce regular disciplined investing in you. You set up the SIP and forget
about it. You do not even need to know when the amount is going to be debited
from your bank account.
 Rupee cost averaging ensures that your purchase price is less and your risk is
minimized. So you don’t have to time the market and lose your shirt.
 SIPs can be started with small amounts, as low as Rs 100/- a month. This ensures
they are easy to invest in.
 You can stop, start or modify your SIP anytime.

Image from rediff.com

Other points to keep in mind :

 SIPs fail in an all time rising market. What this means is that if the market were to go up
continuously, then investment via the lump-sum route will be better than investing in the
SIP way. But the market, over a long period of time, has never consistently gone up or
either down – it has oscillated up and down. So for investors, SIP is still the best way to
invest.
 A SIP in a badly managed fund will not make you rich – remember that this is a means of
investing in the stock market. You need to still pick the right mutual fund and invest in it
systematically to make money.

I am a great enthusiast of mutual funds and the SIP investing style it offers. Investor should use it
to their advantage. Sure, it does not offer the kick direct stock trading offers, but investors have
to decide what’s important for them – the  adrenalin rush of direct stock trading with a huge
probability of losses or the passive sure shot way to riches style that Systematic Investment Plan
of mutual funds offer.

Why not to compare SIP and lump sum returns

Kayezad E. Adajania

A question that is frequently asked by Mint Money readers is whether a lump sum investment in
an equity mutual fund (MF) or a will fetch a staggered outlay through a systematic investment
plan (SIP) better return.

Consider this: If Rs5,000 was invested every month through an SIP in HDFC Equity Fund (HEF)
since 1 January 2008, when equity markets were skyrocketing before it tanked, you would have
got a return of 39.2% by end-2010. However, if you had invested the entire Rs1.80 lakh as a
lump sum, you would have earned just 11%. A similar SIP, however, started on 15 March 2009
when markets started to rise, would have yielded 43% till date compared with 69% if you had
invested the entire amount as a lump sum. We compared SIP and lump sum returns for a couple
of large-cap-oriented equity funds, HEF and Templeton India Growth Fund, and a mid-cap-
oriented fund, IDFC Premier Equity Fund, over the past five years and the difference in returns
were negligible.

Also See | Which one is better? (Graphic)

Getting down to basics

An SIP is a mechanism of investing in equity funds in a periodic manner, either every month or
quarter. Many fund houses also offer daily SIPs. In a typical SIP, you choose an amount that you
want to invest periodically. Once the amount is chosen, it remains constant irrespective of
whether markets go up or down. Say, you choose to invest Rs5,000. In the first month when the
net asset value (NAV) was Rs10, you would get 500 units (Rs5,000/ Rs10). In the next month if
the NAV goes up to Rs12, then you would get 416.67 units but if the NAV goes down to Rs8,
you would get 625 units. There are flexible SIPs too—a new entrant in the Indian MF industry
which has gained popularity since last year—whereby instalments can be changed depending on
the market levels. So when the markets drop, the instalment amount automatically goes up (that
also leads you to buy more units). A lump sum investment, however, entails that the entire
amount is invested up front.

More units

There are two reasons for the deviation of performances, especially in the short run, between
SIPs and lump sum. Firstly, market direction determines how much money you make. An SIP in
choppy markets would accumulate more units when markets drop and less units when markets
rise. For instance, if you had invested Rs5,000 every month through an SIP in HEF starting 1
January 2008 and stayed invested till 31 December 2008, you would have accumulated 1,036
units for a total investment of Rs1.80 lakh. However, if you would had invested the same amount
as a lump sum on 1 January 2008, you would have got only 818 units. “An SIP is devised in such
a way that you don’t time the market; it does the work for you irrespective of where the market
levels are”, says Anil Rego, chief executive officer, Right Horizons, a Bangalore-based financial
planning firm.

For the same reason, the “number of units” phenomenon works against an SIP in rising markets.
If you had put Rs5,000 every month through an SIP in HEF starting 15 March 2009 and held the
investment till date, you would have earned a return of 20% against 50% through a lump-sum
investment, assuming you invested the entire corpus on 15 March. Reason: The SIP investment
would have got you 529 units against 949 units in the lump sum investment.

The other reason behind the difference in performance is the tenor. If you opt for an SIP for a
year or so, SIPs would typically underperform lump-sum performance. An SIP of Rs5,000 made
in Birla Sun Life Frontline Equity fund would have made a loss of 1.6% against a return of 8.4%
through lump sum investment. Says Akshay Gupta, managing director, Peerless Funds
Management Co. Ltd: “The best way to make SIP work is to opt for long-term monthly SIP and
allow it to grow for a period of 10-15 years.”

What you should do

Look at your cash flows and tenor. “If I have a monthly income, SIP makes more sense. This
also means I wouldn’t have the entire lump-sum money at my disposal right at the start; hence it
doesn’t work in this case”, says Amit Trivedi, CEO, Karmayog Knowledge Academy, a
Mumbai-based MF training institute.

But SIP has bigger benefits. You don’t have to think about timing the market. When markets
reached their peak in January 2008, financial planners say many investors invested lump sum
only to panic later and withdrew when markets started to fall. If, on the other hand, you had
started off with your SIP during that time, you would have benefited despite markets falling
52.5% in 2008 and then rising 114% between March 2009 and December 2009. An SIP of
Rs5,000 in Templeton India Growth fund from 1 January 2008 till 31 December 2010 would
have yielded 31.8%. If, on the other hand, you had invested the entire amount (Rs1.80 lakh) as
lump sum, it would have returned only 7.8%. “SIPs not only give you better returns but also
allow you to take advantage of volatility which is a inherent risk in equities”, says Kapil
Mokashi, assistant manager-equity advisory, Sharekhan Ltd.

Rego claims that most investors invest lump sum at higher market levels. “An SIP does the
opposite. It buys more units when markets are down and lesser units when markets are at a
high.”

Tip: Remember to continue SIP in volatile markets, even if markets drop. Mokashi says that
people go wrong in SIPs (they stop their SIPs in turbulent markets) because they do not
understand the concept. Rego adds: “Increasing tenor of SIP helps as it negates volatility. The
probability of making a loss in, say, a 10-year SIP is half of what it is if you do a lump sum
investment.”

Does that mean lump sum doesn’t work? “It works”, says Mokashi, “but only if you have a long-
term horizon and would look at returns after five years”. The choice is yours.

A market that exists between companies and financial institutions that is used to raise equity
capital for the companies. Some activities that companies operate in the equity capital
markets include: overall marketing, distribution and allocation of new issues; initial public
offerings, special warrants, and private placements. Along with stocks, the equity capital markets
deal with derivative instruments such as futures, options and swaps. 

Investopedia Says:
Equity capital markets are very dependent on the information provided by companies regarding
their current financial situations and estimates of future performance. Equity capital market
teams from different investments banks are responsible for helping companies execute primary
market transactions by managing the structure, syndication, marketing and distribution.

The major players within the ECMs are large financial institutions such Goldman Sachs,
Citigroup and UBS.

Related Links:
What's an IPO, and how did everybody get so rich off them during the dotcom boom? We give
you the scoop. IPO Basics Tutorial
Thinking of investing here? We give you five tips to remember. The Murky Waters Of The IPO
Market
Learn to decipher the secret language of the prospectus - it can tell you a lot about a company's
future. Don't Forget To Read The Prospectus!

Read more: http://www.answers.com/topic/ecm-908#ixzz1NVzFgTJr

Imagine this situation – Its New Year eve of 2009 and your rich uncle is here and impressed by you &
your cousin hospitality gifts both of you Rs 1 Lac. You both being financially prudent want to grow this
windfall. You approach a financial planner and as every good planner would, he recommend you to
invest in NIFTY BeeS using SIP. So you follow him and plan investment in 12 monthly SIP installments
while your cousin puts his entire money as lump sum investment in the same NIFTY BeeS. Who do you
think made more money by 2010 New Year eve? Your cousin would have around Rs 1.72 Lac while you
would have Rs. 1.37 Lac. So your cousin gained 25% more just by doing lump sum.

Lesson Learned: SIP is a good way to invest but occasional lump sum investment when the markets
are highly undervalued adds to your gains.

Limited options of dates:

For a SIP in Mutual Fund you need to decide a date in advance when you like to do your SIP and give an
ECS mandate for the same. Most of the MFs have limited option (mainly 1st, 5th, 7th, 10th, 15th, etc).
So you tend to invest in multiple mutual funds on the same date. You want to lessen your risk by
spreading your SIP in the entire month by choosing different dates for different funds.

Way out: For funds having an online option you can do SIP yourself but without emotions coming into
play or second option is do SIP with fundsindia.com that provide SIP on all dates. You can read more
about the same here.

Fixed Amount:

There are times when you feel that markets are undervalued and you want to invest more but then in
SIP only a predetermined fixed sum gets invested. Same is the case when you want to invest less, you
can’t do it.

Way out: Try VIP (Value Averaging Investment Plan). I would write about it soon.

Stopping intermediate payment:

It may so happen that you got an emergency or have a major expense this month and so you don’t want
to invest. But with SIP this is not possible; if there’s money in your bank it will get debited and invested.
The only way out is to cancel the SIP which can be a nightmare if you have a lot of SIPs and also when
you want to start again you need to go through all the formalities to start the SIP. Also for cancellation
you need to inform 2 weeks in advance and even then you may not be sure that SIP would not be
debited.
Lot of delay between actual application & start/stop of SIP:

I feel this is very irritating and you may miss one monthly installment; MF houses need at least a month
to start a SIP and around two weeks to stop your SIP. I think its the time they should try and comeup
with quicker processing of SIPs.

Does not suit people with unpredictable cash flows:

Think of someone who doesn’t have a predictable cash flow like a self-employed professional. He won’t
be able to do SIP as he would be unable to commit a fixed sum every month.

To Conclude:

Even though SIP suffers from these disadvantages but it still seems to be one of the Best investment
option available to a long term investor. It particularly suits First-time investors in equity and those who
do not have a lumpsum or the time to track their investments. The salaried class should also opt for SIPs
since it becomes a good savings habit. Investors who do not wish to be stressed by market volatility
should adopt the rupee-cost averaging method for secured long-term