One Who Fails To Plan, Plans to Fail
Systematic Investment Plan (SIP)
SIP is a bit by bit systematic investment. Under this plan your investments are staggered. That is you invest a fix sum either monthly or quarterly in a mutual fund. Say, for example, you commit to invest a pre-specified amount (Rs 500 onwards) every month or every quarter in a mutual fund. You fix a date on which every month or every quarter the amount gets invested. The first investment has to be by a cheque and then you can either give post dated cheques (PDCs) or opt for electronic clearing system (ECS).
In ECS, you give permission for the amount to be directly deducted from your bank account on the fixed due date. The units are allocated as per the then prevailing NAV on that day of the month. You get more number of units if the NAV is low and vice versa if the NAV is high.
Rupee Cost Averaging
Rupee Cost Averaging means averaging the cost price of your investments. SIP helps in averaging the cost as equal amount is invested regularly every month at different NAVs. SIP works well in a volatile market as in the months where markets are down you get more number of units as the NAV is down and when the markets are up you get less number of units. But over all the prices gets averaged out. This concept, however, may not work in a rising market. As the markets are constantly rising you acquire less and less units and the average cost does not work in our favour. This is especially true in the shorter period. But in the long term scenario the market is volatile, the cost is averaged out and the downside risk is protected.