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Systematic Investment Plans
Systematic Investment Plans (SIP), on the other hand are offered by mutual fund companies, and regulated by Association of Mutual Funds in India (AMFI). SIPs are linked to a risky security like equity, gold, or other fund portfolios and generate returns based on the performance of the underlying security. SIPs also require an investor to contribute a monthly installment towards achieving a long time financial goal.
SIPs work differently from RDs in a way that with every monthly installment/deposit, the investor is allocated a specific number of units, based on the net asset value (NAV) of the fund at that point of time. As per fluctuations in the equity or gold, the NAV of the fund fluctuates.
Net Asset Value = The total value of the porfolio/ total number of units
Lets understand it with an example, say an investor plans to invest Rs. 5000 per month in a SIP
| Month | Investment | NAV | Units | | 1 | Rs.5000 | 10.0 | 500.00 | | 2 | Rs.5000 | 9.50 | 526.31 | | 3 | Rs.5000 | 9.0 | 555.56 | | 4 | Rs.5000 | 10.50 | 476.19 | | 5 | Rs.5000 | 9.75 | 512.82 | | 6 | Rs.5000 | 10.0 | 500.00 |
Total units 3070.88 So when the investor enters at a lower price, he/she gets more units for the same amount. If the investor had invested the entire of Rs. 3000 amount at first month, he/she would have got only 3000 units at that point of time, but with rupee cost averaging, he/she bought an additional 70.87 units worth Rs. 708.70 as on the end date. The profit in this case is Rs. 708.70.However, the returns in case of SIPs are not fixed and there might have been a scenario that the investor would have made lesser profits. |
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