Meaning of SIP
Systematic Investment Plan is a kind of mutual fund which provides an opportunity to investors to invest their small fixed amount of savings at regular intervals. Like each drop of makes an ocean, similarly small savings in SIP results into large fund in the future. Under SIP, a certain amount of money of invested at regular daily/ weekly/ monthly intervals which results into huge savings at the end. SIP can rightly be called as "disciplined mode of investment" as a form of discipline is maintained in SIP.
You can resemble SIP (Systematic Investment Plan) with Recurring Deposit account as a small amount of money is invested at regular time intervals. The only difference is that RD account is managed with a bank or post office whereas SIP account is managed with mutual fund. A layman with his savings of just Rs. 100 can also invest in SIP. With such small savings, he can enjoy the benefits equivalent to Equity Mutual funds.
Systematic Investment Plan provides you freedom to invest in mutual funds with small savings instead of lump sum investment. thus you can invest Rs. 100 per month for certain years instead of investing Rs. 10,000 or Rs. 5,000 in lump sum. This helps you in fulfilling various other financial responsibilities as well as making savings simultaneously.
How Systematic Investment Plan (SIP) works
Working of Systematic Investment Plan is very simple. When the market price of shares falls down, then the investor get the benefit of purchasing more number units due to less cost of shares. On the other hand, when the market price of shares increases, then he gets the benefit of purchasing fewer shares due to increased cost of shares. In other words, you can say that NAV can be higher or lower depending upon the fluctuations in the market conditions of share market. But in most of the cases, total number of units purchased is more than units purchased in lump sum. Let's understand this with the help of an example:
Investor 'A' is investing Rs. 1000 each month in SIP but investor 'B' has invested lump sum amount of Rs. 12,000 by purchasing units at prevailing NAV. Investor 'A' will have more number of units (in most cases) with investment of Rs. 12,000 as NAV can decrease in any subsequent month, providing him the benefit to purchase more number of shares.
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