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How will an SIP help

Posted by sandhyaravii on May 28, 2012

When the markets are falling, it’s a good time to buy. But when prices are falling its psychologically difficult to buy. On the other hand, when the markets peak, many investors enter the market. An SIP ensures thay you buy more when the markets are falling and less when it’s peaking, But if an investor backs out when the markets are falling he won’t be buying when the markets are falling and this will not help him to average his price, the primary reason behind the success of investing through the SIP route.

When you buy the units of a fund, you may do so when the NAV is really high. If the market dips after that, the value of your investments falls and you may have to wait for a long while to make a return on your investment. But, if you invest via a SIP, you do not buying units when the market is at its peak. Since you are buying small amounts continuously, your investment will average out over a period of time. You will end up buying some units at a high cost and some units a lower price. Over time, your chances of making a profit are much higher when compared to an one-time investment

Basically:
The SIP reduces the average purchase cost, even in volatile markets with relative ease. When you invest a fixed amount every month, the number of mutual fund units you actually buy depends on their market price. Therefore, with the money you invest each month, you can buy less units when the market moves up and more units when the market moves down.

This means you are averaging out your cost. If you invest Rs 1000 a month at a price of Rs 20 a unit, you will have bought 50 units (1000/20). But at a price of Rs 10 per unit, you will have bought 100 units (1000/10). Investing a fixed sum regularly means averaging out the cost, as you get fewer units when the price goes up and more when the price goes down.

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