The term “set it and forget it” is ubiquitous in the financial world, and with good reason. Regular contributions to your retirement accounts or investment portfolio can help keep you on the right track for your long-term financial goals.
A systematic investment plan allows you to make regular investments in a mutual fund or other security. Here’s how to set one up, and why it’s a good idea.
Systematic Investment Plan: The Basics
A systematic investment plan (SIP) is a plan in which investors make regular, set payments into a specific investment, usually a mutual fund. Investors can also use an SIP to invest in a retirement savings vehicle such as a 401(k) or other types of investments.
Many investment offices or mutual fund companies offer SIPs as an option to investors. SIPs allow investors to put a small, fixed amount of money at set intervals into various investment options, usually mutual funds. This allows investors to take advantage of a long-term, committed investment strategy, as well as compounding returns
How It Works
When enrolled in an SIP, investors invest a set amount of money on a regular basis into a mutual fund, retirement fund, or other investment accounts. These funds are used to purchase a fixed number of shares, which will vary depending on the share’s price. For example, the higher the share’s price, the lower the amount purchased; the lower the share’s price, the more are purchased.
SIPs can be used to invest in a range of investment vehicles and accounts. Contributions via a systematic investment plan are usually made weekly, monthly or quarterly, but they can also be set up to be made semi-annually or even annually.
It’s important to keep in mind that an SIP is a passive investment strategy, which differs from an active investment strategy in that it’s not actively managed.
Pros and Cons of SIPs
One of the most beneficial aspects of a systematic investment plan is that it encourages regular investing over a long period of time. Remember, most SIPs have a long term commitment, usually around 20 years.
You’ve probably heard of compound interest, and why it can be beneficial for your long-term savings approach. SIPs take advantage of the principle of compounding in a similar way. They allow you to not only earn returns on your principal amount – in other words, the amount of your original investment – but also on the gains you earn on that investment. That way, the amount you stand to earn in returns on your investment grows exponentially over time.
A systematic investment plan can also be beneficial to investors because it helps separate them from the speculative nature of the market and instead encourages a long-term investment strategy, which can help achieve better returns over time.
A potential drawback of a systematic investment plan is that it’s a passive investment -remember: set it and forget it. As such, once your investments reach a certain benchmark amount, you may consider moving from an SIP to a more actively managed investment strategy. This can help you continue to grow your funds.
Other drawbacks include missing out on potential deals within the stock market, or facing high fees when choosing to make a withdrawal since many SIPs have a long-term commitment.
The Bottom Line
An SIP allows you to make weekly, monthly or quarterly investments in a mutual fund or other security. SIPs, which take advantage of compounding interest, can be used for a retirement savings vehicle such as a 401(k) or other types of investments.
Tips for Investing
- A financial advisor can help you set up a “set it and forget it” investing plan. Finding the right financial advisor that fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors in your area in five minutes. If you’re ready to be matched with local advisors that will help you achieve your financial goals, get started now.
- Systematic investment plans are passive investment strategies, which differ from an active investment strategy in that they are not actively managed. Once your investments within an SIP reach a certain benchmark, you may consider moving from an SIP to a more actively managed investment strategy.
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