Why SIPs Work Better: The Science behind Cost Averaging

What is SIP?

One of the smart and hassle-free ways to invest money today is through Systematic Investment Plans (SIPs). You can invest a specific amount that is pre-determined at regular intervals such as weekly, monthly, quarterly. Target to Wealth is one such facilitating name that provides support to its clients in mutual funds investment. The experts at Target to Wealth not only simplifies the process but also educates the investors/clients.

We believe in spreading awareness of investments among rural regions of the country rather than limiting the investment option to the rich. Target to Wealth is a start up that offers financial advice to the customers regarding their investments and provides services in SIP, ELSS, Liquid Funds, Mutual Funds and much more.

How SIP works?

SIP offers an easy and flexible investment plan. It’s ease lies in the fact that the installments are auto-debited from your bank account depending on the mutual fund scheme you have invested in. When you invest in SIP, you are allocated a certain amount of units according to the market rate that is ongoing, known as Net Asset Value (NAV).

Whenever you buy additional units in a scheme, you are offered units on the ongoing market rate for that day and that is usually different from the rate from when you first bought the scheme. Thus, this enables customers to buy units at different rates every time and avail benefits from Rupee-Cost Averaging and Power of Compounding.

Let us try and understand it with an example:

Aman invested Rs. 20000/- in a fund when the NAV was Rs. 40. As the month passed, the NAV of the said fund reduced to Rs. 36. At this point, Aman decided to invest another Rs. 20000/- in the same fund. So what do you think is the average cost of Aman’s units?

Investment NAV Units
Instalment 1 20000 40 500
Instalment 2 20000 36 555.56
Instalment 3 20000 44 454.55
Total 60000 1510.10

Average Cost = 60000/1510.10 = 39.73

How SIP helps in Cost Averaging?

SIPs keep investing your money in the funds at a regular interval and buy more mutual fund units at different prices i.e. it helps in averaging the cost of your investment. The fluctuated prices mean that sometimes you either buy units at a lower price or buy them at a higher one at other times. This is how SIPs averages your cost of investment. Thus, this process lets your average cost of investment come down more than you expect it to. You can also arrive at your average cost by taking the harmonic mean of all the NAVs at which you have invested your money. Sounds confusing? Don’t worry, with Target to Wealth advisors around, all this will be taken care of.

In the case of SIPs, you invest regularly and your money gets more units when the prices are low and it gets fewer units when the prices are high. Further, it may allow you to get a lower average cost per unit during the volatile market. The Power of compounding also takes part in the process of SIP, it means that the sooner you start investing your money, the more time your money has to grow over a period of time. Thus, Target to Wealth is all set to establish a reputed brand value that contributes to creating an investment culture across the country.

Leave a Reply

Your email address will not be published.

Show Buttons
Hide Buttons