Investment School: How does SIP operate?

How does SIP operate?

You would have seen recently a lot of ads regarding SIP(s) in your television sets and in websites while browsing. So what is an SIP and how does it work?. SIP is a tool to bring in more discipline to your investments. SIP is a method of investing in mutual funds.

Via SIP you can invest in a regular intervals of either weeks,months or quarters. However mostly SIP are synonymous with monthly investments. Suppose you invest every month say 5k in a mutual fund SIP, how this money is been handled by the Mutual fund. For every 5000 you pay them, they will buy units of the fund in which you are investing.

Units are similar to shares, but it doesn't represent a single company. So now you know that you are alloted units , but how many units will be alloted is based on NAV(Net Asset Value). Suppose if a net asset value of a fund X is 50 rs today, and if u pay 5000 rs , you will get 100 units of that mutual fund.

These NAV are similar to share prices and they are calculated every day. Don bother much about the NAV calculation. So these NAV(s) keep changing every day. So while going for a SIP, you have to specify the date of the month, so that on every 10th (or some other date) the fund will buy units for you for the SIP amount.

Since timing the market is totally not possible, SIP is a more efficient way of participating in the markets. "Buy low sell high" may be feasible for some intra day traders but not for investors, who builds his wealth slow and steady over the long term.

A use case of SIP for franklin bluechip fund from June 2006 to Dec 2006. A SIP of 5,000 on 10th of every month.

Read it as Month---NAV---Units bought
October ---118.38 ---42.24

Amount invested = 5000*7 = Rs 35000
Total Units = 318. 044
Nav = 127.95(as on 14th Dec)
Market Value = 318.044 * 127.95 = Rs 40693

So get started and achieve cost averaging by investing via SIP.

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