General, Income Tax, Investment, Mutual Funds, Stock Market, Tax, Tax Savers

SYSTEMATIC INVESTMENT PLAN (SIP)

systematic-investment-plan-sip

SIP is a tool used by the mutual fund companies to provide flexibility and ease in investing money by the investors. Systematic Investment Plan (SIP) is a small amount invested every month in a specific mutual fund. One of best ways to enter equity market is through SIPs in equity mutual funds. These help the investor to acquire wealth and his financial goals by investing the amount in a flexible way through installments on a monthly basis. It is also a better way for the investors who are not able to take up the risks of long term commitments.

SIPs are open-ended mutual funds it means the investor can have an opportunity of withdrawing them and can invest them at any time. There is lock in period in mutual funds except in ELSS. Withdrawal of full or partial amount is allowed during or after the tenor of SIP and the amount of SIP can increased or decreased. After investing money every month the investor would end up with more number of units when the market is down and buying less number of units when the market goes up. To gain the benefits of SIP the investment should be for long term. It does not pose any qualification and age limit. It also provide tax benefits thus been a good mode of investing.

Process:

A fixed sum of money is debited from investor’s bank account and invested in specific mutual fund. The investor after investing will be allocated with certain number of units accordingly with Net Asset Value(NAV).Every time a sum of money is invested that will result in a increase to the number of units purchased by the investor.

Here, we can have look over the benefits of SIP

Benefits of SIP:

Small Payments:

The investor can have flexibility of investing the amount he could invest. The initial minimum amount for investing in any Mutual Funds is Rs.5000 INR by the facility of SIP one can make the payment of Rs.500 per month that suits for every person’s budget.

Flexible:

SIP makes the mode of payment flexible as the investor has the facility to increase or decrease the amount and in case on inability to make the payment of SIP he can choose the option of “pause SIP” through which he can stop the payment up to 6 installments.

Organized:

Through SIP system the mutual funds become well organised.These encourage the investors to deposit in a most lucrative schemes of Mutual Funds.

Quick and Efficient:

Starting of SIP in an efficient and quick manner by submitting the details of investor like PAN number, IT details, sources of income etc through online.

Investor protection:

These prevent the investors from speculation in volatile market. If the market is in downward direction the investor can halt the payment.

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Meaning of NAV: The Net Asset Value (NAV) of a company’s share varies from one ULIP to other ULIP and completely dependent on the market conditions. It is calculated on the holdings and liabilities of the funds. The Net Asset Value of share is valued by dividing the fund liabilities from the fund holdings.

Net Asset Value =fund holdings / fund liabilities (current market value).

Illustration:

A invests Rs1000 every month (for six months) and B has invested Rs.6000 lump sum in the same Mutual Fund and the NAV varies accordingly to the market. Let us see who will be in a lucrative position.

Investment of A:

Month     Amount     NAV     Number of Units

JAN           1000          298.5           3.35

FEB            1000          269.5           3.71

MAR          1000          268.9           3.71

APR           1000         282.6            3.53

MAY          1000         286.3            3.49

JUN          1000         280.4            3.56

Totally the investment of A is Rs.6000 and he ends up with 21.35 units.

Investment of B:

Month          Amount                NAV                 Number of units

JAN               6000                 298.5                      20.10

Totally the investment of B is also Rs.6000 and he ends up with only 20.10 units.

Calculation of number of units:

Number of units purchased is calculated by the following formula

* No. of units = investment / NAV.

SIPs provide the convenience and flexibility of investing for the interested investors. From the above example it is clear that SIP can increase the number of units and protect the investor’s interest.

 

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CA Rachit Jain

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