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A Systematic Investment Plan (SIP) is a vehicle offered by mutual funds to help investors save regularly. It is just like a recurring deposit with the post office or bank where you put in a small amount every month, except the amount is invested in a mutual fund. The minimum amount to be invested can be as small as INR100 (100 Indian Rupees) and the frequency of investment is usually monthly or quarterly.

This is a plan where investors make regular, equal payments into a mutual fund, trading account or retirement account, such as a 401k. By using a systematic investment plan (SIP), investors are receiving benefits from the long-term advantages of dollar-cost averaging and the convenience of saving regularly without taking any actions except the initial setup of the SIP.

Dollar-cost averaging involves buying a fixed-dollar amount of a security regardless of its price. Therefore, shares are bought at various prices over time and the average cost per share of the security will decrease over time. Dollar-cost averaging lessens the risk of investing a large amount of money into a security. In addition to SIPs, many investors reinvest dividends received from their holdings back into purchasing more stock, called dividend reinvestment plans (DRIPs).

How a SIP works

A SIP allows investment in the stock market without trying to second-guess its movements. It is also known as dollar cost averaging.

A SIP means the person commits to investing a fixed amount every month. Let's say it is 1,000. When the Market price of shares fall, the investor benefits by purchasing more units; and is protected by purchasing less when the price rises. Thus the average cost of units is always closer to the lower end.) {NAV : Net Asset Value, or the price of one unit of a fund. Can be computed as follows: NAV = [ market value of all the investments in the fund + current assets + deposits - liabilities ] divided by the number of units outstanding.}

Date      NAV       Approx number of units you will get at  1000

Jan 1      10           100

Feb 1     10.5        95.23

Mar 1    11           90.90

Apr 1     9.5          105.26

May 1    9              111.11

Trade Microsoft stocks

Jun 1      11.5        86.95

 Within six months, this is a value of 589.45 units by investing just  1,000 every month.

Over the long run, money can either be gained or lost.

Let's say an investment in a Mutual Fund unit during the dot com and tech boom.

Say it began with 1,000 and kept investing 1,000 every month. This would be the result:

Investment period

             Mar 2000 � Mar 2005

Monthly investment

             1,000

Total amount invested

             61,000

Value of investment of Mar 7, 2005

             109,315

Return on investment

             23.87%

 Had the units been bought on March 13, 2000 at 10.88 per unit (the NAV then), the result would be a loss because the NAV was just 7.04 on March 7, 2005. But because of spacing out the investment, it is a gain.

Conversely if the market had trended higher from the day investing started, the result would be loss of an opportunity. This would happen as subsequent purchases will get a smaller number of units for the same amount.  Great for the following needs:Futures, advisory, service, Investment, advisory,counselors,research, Manager of mutual funds, contract , fee basis.

Systematic Investment Plan can help people to be disciplined but not solve market timing issues. Further, the Investment advisors or the Mutual Fund may have a vested interest in pitching this idea to consumers as a method of future investment would also accrue effortlessly.