Blog Misc Systematic Investment Plans: All You Need To Know

Systematic Investment Plans: All You Need To Know

date January 20, 2022 time 5 min read 223 views

Thanks to systematic investing, investors can save regularly with a small amount of money while benefiting and building wealth from the long-term advantages of a dollar-cost averaging strategy. So, how does a systematic investment plan (SIP) work? 

Systematic investing tends to be passive once you put money in. You keep investing in it regardless of its performance, then grow your assets slowly. While many may reconsider their automatic investing plans when hitting a certain amount of getting to a point near your retirement, others choose system investing in their portfolio as a safe method to build their wealth. 

A systematic investment plan is a cost-effective way to minimize your risks and build your wealth over time.
A systematic investment plan is a cost-effective way to minimize your risks and build your wealth over time. (Source: Pixabay)

So, what does a SIP mean, and what are the advantages of system investing? Can it help you save $5000 in 3 months faster? Let’s dive in and read our article.

1. What does a SIP mean?

A systematic investment plan (SIP) is an investment route offered by a mutual fund to put a small amount of money as little as $50 periodically. This fixed amount is deducted from your bank account every month, which allows you to invest at predefined intervals in your preferred mutual fund scheme (can be on a weekly/ monthly/ quarterly/ semi-annually or annual basis) rather than making a lump-sum investment. 

Systematic investing allows people to invest in a time-bound manner without worrying about the market volatility and gain benefit in the long-term thanks to average costing and power of compounding. Once you start early and invest steadily in this manner, it is likely to meet your financial goals soon to turn $1000 into $5000 in a month.

In short, systematic investing is flexible, and it allows investors to increase and decrease the amount of money or even stop investing whenever they want. 

Systematic investing may be the safest and best choice for beginners and risk-averse investors in the dynamic financial market.
Systematic investing may be the safest and best choice for beginners and risk-averse investors in the dynamic financial market.  (Source: Pixabay)

2. How does a systematic investment plan work?

Mutual funds and other financial intermediaries provide investors with a variety of options including systematic investment plans. The principle of systematic investing is simple since it allows you to invest a fixed sum of money on the given consistent basis, and then gain benefit over a longer period instead of making large lump sums all at once. 

Every time you invest in a mutual fund scheme through a systematic investment plan, this means you purchase a certain number of fund units. Furthermore, you don’t need to time the markets since you gain benefits during the highs and lows. In other words, systematic investing helps you remove market timing that is a risky proposition as one can invest in the bearish market trends and other investment trends

3. Benefits of systematic investing

When compared to other investment options, systematic investing has certain benefits as follows:

  • Power of Compounding

When investing steadily in a systematic investment plan and keeping it over a long period, you will unleash the power of investing in compound interest. This effect allows you to earn not only on your initial investment but also on the gains on the principal amount. 

The power of compounding and rupee cost averaging are two key advantages that make systematic investing different from other options.
The power of compounding and rupee cost averaging are two key advantages that make systematic investing different from other options. (Source: Pixabay)
  • Cost averaging

A systematic investment plan is an ideal option to deal with market volatility and financial distress since the rupee cost averaging results when you stagger your investments over time. So, you can earn more compared to a lump-sum investment.

When the markets are down, systematic investing allows investors more units of the fund while purchasing fewer units when the price rises. That way, they can reduce the average cost per unit of investment through Rupee Cost Averaging. 

The purchase cost may vary from a systematic investment plan installment to another as the net asset value (NAV) of all mutual funds is updated every day. Then, the cost of purchase averages turns out to be on the lower side over time. It is the benefit of rupee cost averaging that is not available in a lump sum.

  • Low initial investment

If you are a beginner or a risk-averse investor, systematic investing works for you since you can get started with an amount as low as $50 each month in mutual funds. Then, you can increase your monthly systematic investment plan whenever you want. Every systematic investment plan has a minimum duration of a year, but you can cancel anytime.

Once you set the fixed amount and the frequency to invest, there is not much more to do. Since many systematic investment plans are funded automatically, all you need to do is make sure the funding account has enough money to cover your contributions. 

  • Become a disciplined investor

Investing via a systematic investment plan would make you disciplined in terms of taking control of your financial health. With the option of automated investment, you don’t have to be stressed with your diversification every month. In other words, you don’t need to do intensive market research analysis to balance or adjust your portfolio.

  • Acts as an Emergency Fund

Fund investors may consider a systematic investment plan as an emergency fund. Since with a simple withdrawal process, you can stop at any time. In addition, many investors use SIP for retirement to build wealth over time and fulfill their financial goals.

With long-term advantages, many investors use a SIP for retirement to diversify their portfolio.
With long-term advantages, many investors use a SIP for retirement to diversify their portfolio. (Source: Pixabay)

4. How to start systematic investing

  • Complete your KYC

The first thing investors need to do is complete the KYC documentation process before investing. You will be required to submit your identity proof, address proof, and photographs. The e-KYC option is also accepted, so it can save your time without visiting the AMC.

  • Set your investment goals

Before taking action, you should break down your financial goals to motivate yourself and clarify what you wish to accomplish. It will help you take it easy to look for the mutual fund that works for you since each mutual fund provides a specific objective. 

  • Choose the SIP

Once you set goals and select a particular fund, choose the systematic investment plan parameters. Fill in the details for questions like:

  • Investment tenure.
  • Fixed date of investment (monthly, quarterly, semi-annually, etc).
  • Fixed amount of money.

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