<img height="1" width="1" src="https://www.facebook.com/tr?id=355574881622306&amp;ev=PageView &amp;noscript=1">

Thayer Partners Blog

What Is a Systematic Investment Plan (SIP)?

[fa icon="calendar"] Apr 8, 2016 9:00:00 AM / by Chris Wilmerding

Chris Wilmerding

What_Is_a_Systematic_Investment_Plan_SIP.jpgThe intricacies, complexities, risks, and time-consuming activities involved in investing can scare some folks away. If you’re looking to save and invest but you don’t want to spend all of your time checking out the stock market, buying and selling, then a systematic investment plan (SIP) may be just what you’re looking for. In fact, you might already be using such a plan without realizing it.

With a SIP, you make regular, equal payments into a mutual fund, retirement account, or trading account, without taking any other action other than the initial setup, and, aside from the initial commission, you can usually set up the subsequent investments to be commission-free. If you contribute to your company’s 401K, then you already take part in a systematic investment plan.

The Benefits

The main advantage of a systematic investment plan is that you get to benefit from long-term advantages of dollar-cost averaging without having to do any additional work. You simply set up regular payments to go into the fund or account and let it build and grow. You can invest small amounts monthly or quarterly, though monthly is ideal.

By dollar-cost averaging, you don’t have to speculate in volatile markets.

A systematic investment plan is ideal for those investors who do not have large lump sums to throw at the market. If you want to invest but don’t have a lot of cash right now, you can invest smaller fixed amounts over time with a SIP.

It’s also ideal if you don’t have the time or resources to actively participate in your investments.

A SIP is flexible and you can stop investing in the plan at any time or even choose to increase or decrease the amount of your fixed payments. Full and partial withdrawals are also possible. But keep in mind, in order to really reap the benefits of a SIP, you should be investing in the long term with a consistent and meaningful amount every month.

A systematic investment plan also encourages disciplined investment—which is a key to successful investing. A SIP helps you to get into the habit of saving regularly and building wealth for your future. Every monthly investment gets you one step closer to reaching your financial goals. It’s a smart and hassle-free way to invest.

How It Works

When you use an SIP, a fixed amount of cash is auto-debited into your specified mutual fund, trading account, or retirement account from your bank account. We generally recommend for clients a low cost, globally diversified stock fund.  From this money, you are allocated a number of units based on current net asset value in the fund of your choosing. Every time more payments are invested, more units are then added to your account, which means you’re buying units at different rates. Because of this, you benefit from two things: the power of compounding and dollar-cost averaging.

Because you’re investing sums over the long term at equal interval and growing the principal each year (on average, at least), you get to benefit from faster accumulation of wealth thanks to the power of compounding. This assumes the market goes up over that period as well, of course.

Dollar-cost averaging allows you to opt of the guessing game in volatile markets. You don’t have to worry about the best time to invest or trying to time the market. Your money will get you more units when the price is low, and less when the price is high, so you can achieve a lower average cost per unit during volatile periods.

Due to the power of compounding and dollar-cost averaging, a systematic investment plan has the potential to deliver higher returns over the long term.

Give It a Try

A SIP is one of the best ways to enter the market. It offers myriad advantages including convenience, discipline, and flexibility, along with the potential for high returns. If you are afraid of the market’s volatility, afraid of major long-term commitments, or don’t have the time for active investing, then consider a systematic investment plan.

When considering dollar-cost averaging or systematic investment plans, please consider your ability to continue investing during periods of low price levels. These programs do not assure a profit or protect against a loss in declining markets. Investments are subject to risk including the loss of principal.

New Call-to-action

Topics: Systematic Investment Plan, Investing

Chris Wilmerding

Written by Chris Wilmerding

Chris Wilmerding is Principal of Thayer Partners, an independent investment management firm located in Westwood, MA providing financial planning and wealth management counsel to individuals and their families.

Subscribe to Our Blog

Avoid Running Out Of Money At Retirement

Recent Posts