Systematic Investment Plan (SIP)

04.06.08

Conceptually SIP means investing a fixed sum of money at regular intervals irrespective of the market conditions. Timing the market is extremely difficult as no one can predict the market conditions, both in the short term as well as in the long term. SIP, therefore, helps in rupee averageing of day to day variations in market price of a particular script. Let us take an example and understand the concept by investing a sum of Rs.3600/- on 10th of every month.

-------------------------------------------------------------------------

1st month bought 360 shares of A Co. @ Rs.10/- per share.

-------------------------------------------------------------------------

2nd month bought 300 shares of A Co. @ Rs. 12 per share.

-------------------------------------------------------------------------

3 rd month bought 277 shares @ Rs. 13/- per share.

-------------------------------------------------------------------------

4th month bought 257 shares @ Rs.14/- per share.

-------------------------------------------------------------------------

5th month bought 277 shares @ Rs.13/- per share.

-------------------------------------------------------------------------

6th month bought 300 shares @ Rs. 12/- per share.

-------------------------------------------------------------------------

7th month bought 327 shares @ Rs. 11/- per share.

-------------------------------------------------------------------------

8th month bought 277 shares @ Rs. 13/- per share.

-------------------------------------------------------------------------

9th month bought 240 shares @ Rs. 15/- per share.

-------------------------------------------------------------------------

10 th month bought 225 share @ Rs. 16/- per share.

-------------------------------------------------------------------------

11th month bought 240 shares @ Rs. 15/- per share.

-------------------------------------------------------------------------

12 th month bought 225 shares @ Rs. 16/- per share.

-------------------------------------------------------------------------

The average of

360+300+277+257+277+300+327+277+240+225+240+225=3350 shares is Rs. 13.1 as against the market price of Rs. 16/- at the end of 12 months. Therefore, the total investment of Rs. 43200/- is worth Rs. 52883/- giving an average return of 22%.

-------------------------------------------------------------------------

------------------------------------------------------------

07.06.08:

------------------------------------------------------------

Let us expand this concept further through a real life example. Let us select a good growth stock first, like India Glycols Ltd. Its closing price as on 6.6.08 is Rs.280/-. Let us invest approx. Rs. 5000/- per month in this stock on 6th of every month.

-------------------------------------------------------------------------

Let us buy 18 shares of India Glycols Ltd. on 6.6.08 @ Rs.280/- for a total price of Rs.5040.

-------------------------------------------------------------------------

05.07.08:

-------------------------------------------

Let us buy now 22 shares of India Glycols Ltd. on 4.7.08 @ 232.50 for a total sum of Rs. 5115.

Now, as on 5.7.08, we will have 18+22=40 shares @ 253.875 per share.

-------------------------------------------------------------------------

6.08.08

Let us buy 23 shares of India Glycols @ Rs. 217/- on 6.8.08 for a total sum of Rs. 4991/-

Now as on 6.8.08, we will have 18+22+23=63 shares @ 240.41.

---------------------------------------------------------------------------