Systematic Investment Plan

SIP is regular, fixed investment in Equity or equity related product like mutual fund. SIP is similar to recurring deposits in Bank and Post office. So the basic difference between SIP and Recurring Deposit is that In Recurring Deposit the annual rate of return is fixed unlike SIP where the annual rate of return will be varied according to market condition even it can result in negative return in unfavorable markets.
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.Equity market if we look back in to history we can see that we will get handful return by investing in a stock for longer period and some of the return are unimaginable which make people rich but the sad story is hardly a very few had made very good return from equity. The equity market are very volatile when you really saw your invested stock fluctuate between the return it will create some sort of dilemma in the mind of the investor to press for sell button even though the optimal target of stock has not attained ie ex when a stock give you return of 25 % in 1 month next month if the stock retrace back to original buy level again it rose past the 25 % return and when suddenly retrace to 10 % return if these event happen for some time really majority will go for a profit booking rather than wait for target The main reason for this psychological phenomena is Fear of insecurity by investing lump sum amount in equity when it accounts more than 30% of his life whole savings or amount not easily affordable by us. When value of such investment drops Pessimism will override the Optimism he had at the time of investment and in this situation majority will go for sell..
The best solution for investor to overcome the fear is SIP.The advantage of SIP is that the shares are bought at different prices at different times and the average cost of security will decrease and SIP can be done with small amount of money so the fears of investing the big amount can be invested. Before doing SIP make a plan and make the payment amount as convenient for the investor because the investment amount should be fixed and does not alter the monthly investment amount otherwise the SIP will not work out. The basic process of SIP is averaging. Averaging is process of buying the shares at lower price some time averaging will be disastrous if investor is Choosing a bad company for investment. Next most important step is the payment interval. Monthly payment option is the widely used interval but if investor can reduce this to weekly it will be a good idea as it will be good for averaging..SIP is a long term investment so choose only good fundamental companies if choosing to invest in shares diversify the monthly invested amount into different companies. Diversification will reduce the risk Otherwise SIP can be done safely on Index ETF,Gold,Other commodity ETF and more here the risk factor is low as the return
The below table is an example of SIP Here in this hypothetical case an investor is investing Rs 1000 monthly for six year.He started the investment when the stock was quoting at Rs 75 on 2005 and on the end Rate of stock was Rs 100 just 33% return if he invest the stock fully at that rate.Note rate per unit is yearly averaged price.

Fixed amount	Time	Rate per unit	No of Unit
12000	2005	75	160
12000	2006	50	240
12000	2007	25	480
12000	2008	40	300
12000	2009	60	200
12000	2010	100	120

Total Investment in SIP Rs72000
No of unit at end= 1500
In SIP the amount will be Rs 150000 a return of 108 % In recurring deposit of the same amount at 10 % interest the same will be 98000 approximately

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Systematic Investment Plan

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