What is a SIP?
SIP stands for systematic investment plan: buying units of a mutual fund, or another asset, with a fixed amount every month (or every three months). In Bangladesh many open-end mutual funds let you invest in monthly instalments this way. Buying shares yourself with a fixed sum each month follows the same idea.
Because the amount stays the same, you buy more units when the price is low and fewer when it is high. This is called cost averaging. As a result, your average cost per unit is usually a little lower than the average price over the same period.
Say Nadia has started her first job and is paid on the 1st of each month. She decides that on the 5th of every month Tk 3,000 will go into a fund, whatever the market is doing. In the first month the market falls, in the second it rises, and she carries on without watching the news. By the end of the year she has put in Tk 36,000 and never once had to agonise over “when to buy”. The numbers are only an example.
Why it matters to an investor
- It fits a salary: most people don’t have a big lump sum, they have a monthly income. A SIP is a way to invest straight from that income.
- It removes the pressure to time the market: nobody knows for sure when the market is at its lowest. Buying regularly means you don’t need to guess.
- It manages emotions: instead of freezing in fear during a fall, you automatically buy more units at lower prices.
- It builds a habit: invest first, spend after. When money goes out automatically, saving no longer depends on willpower.
Lump sum versus step by step
If you already have a large sum, the question is: invest it all at once, or spread it over several months? A 2012 study by a large US fund firm found that, in historical data for the US, the UK and Australia, investing a lump sum beat spreading it over 12 months about two-thirds of the time. That is because markets rise more often than they fall, and the waiting money earns less meanwhile.
But in the other third of cases, investing step by step did better, and for many people the pain of investing everything and seeing a big fall the next day is far greater. So it is a question of feelings as well as arithmetic. And for someone with a monthly income, the question doesn’t really arise: regular investing is the natural route.
DPS and SIP: alike and different
- Alike: both take a fixed amount every month, and both build a saving habit.
- Different: a DPS has a known term and interest rate. A SIP’s result depends on the fund or share price, so it can earn more, but it can also lose money.
- A SIP does not prevent losses: if the market stays down for a long time, you can still be at a loss despite buying regularly. It spreads risk out; it does not remove it.
Worked example
- Tk 2,000 buys units of a fund each month. Say the unit price over four months is Tk 100, 80, 50 and 80.
- Units bought: 20, 25, 40 and 25. That is 110 units for Tk 8,000 in total.
- Your average cost per unit: 8,000 ÷ 110 ≈ Tk 72.7. Yet the average price over the four months was Tk 77.5.
- At the end of month four the price is Tk 80: your 110 units are worth Tk 8,800.
Result: although the price is still below the starting Tk 100, you are about 10% up, because you bought more units while the price was low. Had the price kept falling, you would be at a loss too. The numbers are only an example.
Common mistakes
- Stopping a SIP when the market falls. That is exactly when it buys more units at lower prices.
- Treating a SIP as a “sure gain” or as if it were a DPS. Its result depends on the market.
- Buying regularly without understanding what you are buying. Regular buying is a good habit, but you still need to know where the money goes.
- Starting a SIP without an emergency fund, then having to withdraw at a bad moment when something comes up.
Investing a fixed amount regularly takes away the need to guess the market’s timing: keeping the habit going is its real strength.