Systematic Investment Plan

Systematic Investment Plan (SIP)

You Earn Regularly…
You Spend Regularly…
Do You Invest Regularly?

If you’ve been reading up on mutual fund investing, you would definitely have heard of SIP, or Systematic Investment Plan. The way SIP is talked about by financial advisors, it almost sounds like magic. And guess what, it almost is. For all practical purposes, when compared to the usual ways of investing, the effect of SIP investing is almost magical.

What is SIP: SIP simply means investing regularly on a fixed schedule. It’s not a specific mutual fund or type of mutual fund, but simply a way of investing, that’s all.

In practice, mutual fund companies offer a variety of facilities to make it convenient for you to invest regularly without forgetting and without going through the inconvenience of writing a cheque every month. They offer a variety of periodicities like monthly, quarterly or weekly and even daily that fit your income and savings cycle. They also offer a variety of payment methods like post-dated cheques, NECS and other electronic facilities. But remember, all these are just there to help make SIP easier—the magic of SIP comes from the regularity of investing.

How SIP works its magic: To understand how SIP helps you, you need to understand the basic principle behind it. The ‘professional’ sounding term is ‘Rupee Cost Averaging'.

Most of us don’t succeed too well in making money from either equity or equity-based mutual funds because we tend to invest only when the markets are high. This is a natural human tendency and is very difficult to overcome, even for seasoned investors. When the Sensex is zooming, we convince ourselves that it is going to keep zooming and we invest. However, in the short-term, stock markets may turn cyclical and sooner or later, the markets start falling. When this happens, we fall into a pessimistic mood and sell our investments. At best, some of us manage to wait for the markets to recover what we have lost and then sell.

On the whole, this type of investing cycle adds up to ‘Buy High, Sell Low’—the exact opposite of what is needed.

SIP cures this problem by ensuring that you always keep investing. In practice, what this means is that you are investing when the markets are low, as well as when they are high. However, when you keep doing this regular investing for a long time, your average cost of acquiring each unit of the fund is much lower than what it would have been had you invested only when the equity markets were making news. Eventually, when the time comes to enjoy the fruit of your wise investments, your gains are much higher because your cost was lower.

Once you understand this simple arithmetic behind SIP, you realise that SIP actually makes the downward part of the cycle work for you! Your average cost of acquiring each unit is low precisely because you tend to keep investing even when the markets were down. In other words, SIP has helped you automatically achieve the ultimate goal of investing at 'Buy Low'.

However, it’s obvious that for this magic to work, SIP must be carried on for a long time and above all, and ideally must not be interrupted when the equity markets are down. That would be completely counterproductive.

However, the key is SIP which automatically gives you the patience and regularity to realise those gains effortlessly.


SIP is an investment technique which can be used for almost any fund.
SIP investment can help you get higher gains by ensuring that you invest regularly and provided you keep investing without interruption.
The true benefits of SIPs are realised by investing over the long-term.