Automated Savings Using Systematic Investment Plans

Automated Savings Using Systematic Investment Plans
Automated Savings Using Systematic Investment Plans

Time is precious for everyone regardless of social standing or financial status, especially if you are an investor. Systematic investment plans or SIPs can help you automatically pitch in your investment and give you more time to spend on your other priorities in life. No need to worry about finalizing your investments. Decide it once and forget about it. The timing of investments or purchases is subject to poor decisions. You can remove all the potential wrong decisions by using automated savings. 

People often perceive specific market timings to be a better idea, but it has a more negative impact than one may realize. You are guaranteed to get good long term results by using systematic investment plans to invest in the mutual fund schemes. Let us study SIPs and their effect on mutual fund schemes investments.    

Understanding Systematic Investment Plans (SIPs)

Let us start by understanding the meaning of systematic investment plans(SIPs). A SIP is a periodic investment strategy or repetitive investment plan that can effectively automate your savings strategy. This plan allows investors to specify a fixed amount of shares or fixed dollar amounts in several investment schemes such as mutual funds, stocks, or ETFs. You can also determine your investment frequency, such as monthly, bi-monthly, quarterly, etc. depending upon your fund house. It allows you to use a bank savings account or money market account, also known as a liquid account, to fund or process the amounts of your investment(buy shares of investment type of your choice). 

For instance, you can easily customize your systematic investment plan to invest a selective fixed amount in the mutual funds of your choice on a certain date of every month. Several SIP companies or brokerage firms allow their investors to select a specific date or day of every month. However, the most common SIPs dates are 30th, 15th, and 1st of every month. Next, we will learn about Dollar-cost averaging.    

Automated Savings Using Systematic Investment Plans
Automated Savings Using Systematic Investment Plans

 

Dollar-Cost Averaging

Dollar-cost averaging, often known as DCA, is one of the crucial aspects of systematic investment plans, an investment strategy that instigates periodic or regular purchasing of shares and investments. The total cost per share of the investment can be reduced using the strategic value of dollar-cost averaging(DCA). In addition to that, you get an automatic purchasing schedule with most of the established DCA strategies. In contrast to a system, due to our human emotional nature, we tend to make poor decisions during market fluctuations. Automatic our investments can weed out such bad decisions and, in turn, increase our returns.      

Smart Investment Methodology For Automated Savings 

The psychology of systematic investment plans symbolizes smart behavioral investing. More often than not, investors do not realize that their worst enemy is themselves. You can effectively overcome human error by automating your investment plans and savings. Behavioral finance ( a subcategory of personal finance) explains that human nature or behavior has a significantly greater impact on an investment’s effectiveness than allocating assets or selecting the investment plan. At times, human behavior can be described as potentially self-destructive with emotions such as complacency, greed, and fear. 

Automated Savings Using Systematic Investment Plans
Automated Savings Using Systematic Investment Plans

Many investors may not realize this, but they often make bad decisions when possessed by intense emotions. For instance, sometimes, the stock market prices are skyrocketing, and the news headlines portray a vast profitability environment and new records of stock indexes. Investors tend to neglect risk assessment in these conditions and invest their money in higher-risk assets. The vice versa of the same situation also holds. Sometimes the stock market prices fall sharply for an extended period. The investors quickly look to sell their shares. This whole idea of buying when prices are high and selling when prices are low contradicts the critical concepts of smart investing.  

You can utilize a systematic investment plan(SIP) to remove the emotion factor from investment by automating your share purchase periodically(as per your convenience). The program will automatically invest your shares regardless of whatever the media says or the status of the financial markets.  

Establishing a SIP For Automated Savings

Establishing a systematic approach or a SIP is very simple than you may think. First, decide between several mutual fund companies and select one. Most of the companies offer SIPs such as T. Rowe, Fidelity, and vanguard investments, etc. Second, you can request these plans from your company. Lastly, the company will set you up with your SIP, and you are ready to roll. Remember not to entirely forget about it and try to increase your investment wherever you can.