Steps Towards Average is a Ladder Towards Mileage(Goals)
Last Updated : July 26, 2019, 5:15 p.m.
Investors in Mutual Funds often face a dilemma about which is a better mode of investing in Mutual Funds – lump sum or Systematic Investment Plan (SIP)
An SIP allows an investor to invest a fixed amount of money at regular intervals.
However, there may be situations when an investor would prefer to invest in one go which is Lump Sum.
Although multiplication of money happens in both the modes (SIP/Lumpsum), the actual miracle happens in the form of Averaging in SIP mode.
Rupee Cost Averaging : Rupee cost averaging is an approach in which you invest a fixed amount of money at regular intervals. This, in turn, ensures that you buy more shares of an investment when prices are low and less when they are high.
Let’s have a glimpse on the impact of averaging through the table.
| SIP Installment | SIP Amount (In ₹) | NAV | Units Allotted** in SIP | Lump Sum Amount (In ₹) | Units Allotted in Lump Sum |
|---|---|---|---|---|---|
| 1 | 10000 | 10 | 1000 | 1,00,000 | 10000 |
| 2 | 10000 | 11 | 909.1 | 0 | |
| 3 | 10000 | 9 | 1111.1 | 0 | |
| 4 | 10000 | 8 | 1250 | 0 | |
| 5 | 10000 | 12 | 833.3 | 0 | |
| 6 | 10000 | 11 | 909.1 | 0 | |
| 7 | 10000 | 10 | 1000 | 0 | |
| 8 | 10000 | 9 | 1111.1 | 0 | |
| 9 | 10000 | 10 | 1000 | 0 | |
| 10 | 10000 | 8 | 1250 | 0 | |
| Total | 1,00,000 | 10373.7 | 0 | 10000 |
- NAV : Net Asset Value (NAV) of a mutual fund is the value per unit based on which investors purchase, redeem or transfer units in the mutual fund. Net Asset Value (NAV) is a fund’s market value per unit.
** Units Allotted: is calculated by dividing Investment Amount by NAV.
In the above table, we can clearly see the investment amount is same in both the modes i.e. 1 Lakh. But while taking a systematic entry into the market at different NAVs , an investor ends up with accumulating 373 more units in comparison with one go investment of 1 Lakh which gives only 10,000 units.
By investing in a fixed schedule, you avoid the complex or even impossible duty of trying to figure out the exact best time to invest. The rupee cost averaging effect – averages out the costs of your units and hence lessens the results of short-term market fluctuation on your investments.
Though the mutual fund is considered as a safe way of investing for return, the underlying fact is that none of the mutual funds are safe though all mutual funds are safe. Well, how safe or unsafe your mutual fund is, depends on how you invest in them.
The approach is a lot safer than investing a lump sum at one time because you avoid the risk of catching a market top. If you keep waiting to buy when the market bottom, you may miss out if the market rises suddenly.
“ Message to all with this passage of mine, start an SIP for a longer period of time”
The writer of this post is Ms Charu Chhabra, she is a team leader in Mutual Funds division at Wishfin
Disclaimer – “Mutual fund investments are subject to market risks. Please read the scheme document carefully before investing