SIP is Systematic Investment Planning and it is designed for people who want to be involved in market during all the time, thereby minimizing the risk involved in the volatility of the market. There are many mutual funds currently providing with SIP for the investors and almost all the funds have either the online agents or the agents directly collecting the cheques from your doorstep for investing in your favored fund. Check out Are agents your friends? before deciding and investing on their suggestions. There are no entry load for most of the mutual funds now but still all the agents would still get the Trial commissions which would differ from each fund house to fund house. So, its better to be aware rather to cry later.
Coming back to the SIP fundas, You invest a constant sum of amount irrespective of the market condition. It works best for the equity mutual fund and I am going to take an example of the equity diversified mutual fund.
Say, If you put Rs.10000/- every month on to a mutual fund and this mutual fund's NAV differs according to the market conditions, you get the number of units according to the current NAV.
NAV No. of Units
April 2011 55.66 179.66
May 2011 61.21 163.21
June 2011 58.27 171.61
July 2011 65.66 152.3
From the four months data itself, it can be clearly seen than, As the NAV increases, the no. of units you buy decreases and when the market is down (NAV decreases) and you buy a lot more for the same money and the no. of units increases. So, you already know, when the market goes down, you want to buy more and when it goes up, you want to buy less and you are doing exactly that with SIP.
This works best when you are invested for extremely long time and you might say, I can invest the whole Rs. 20000/- during the month of June 2011 after April 2011 instead of May 2011. Its extremely hard to time the market and what would you do if the market turns its head and ran towards 63 NAV. And if you are a long term investor, its best to remain invested in the market and continue your SIP for a long time to come.
And never forget to get out of your equity exposure at the right time (just before the requirement for your goal, say 13 years from now, if you are planning for your retirement at 55 and your current age is 40) and move all your funds to safety to the debt level so that you are in never a position to sell all your holdings at a loss.