What Is a Systematic Investment Plan (SIP) ?

A systematic investment plan (SIP) is a plan in which investors make regular, equal payments into a mutual fund, trading account, or retirement account such as a 401(k). SIPs allow investors to save regularly with a smaller amount of money while benefiting from the long-term advantages of dollar-cost averaging (DCA). By using a DCA strategy, an investor buys an investment using periodic equal transfers of funds to build wealth or a portfolio over time slowly.

Key Takeaways

• A systematic investment plan involves investing a consistent sum of money regularly, and usually into the same security.
• A SIP generally pulls automatic withdrawals from the funding account and may require extended commitments from the investor.
• SIPs operate on the principle of dollar-cost averaging.
• Most brokerages and mutual fund companies offer SIPs.

Advantages of Systematic Investment Plans

SIPs provide investors with a variety of benefits. The first, and most obvious, benefit is that once you set the amount you wish to invest and the frequency, there's not much more to do. Since many SIPs are funded automatically, you just have to make sure the funding account has enough money to cover your contributions. It also allows you to use a small amount so you don't feel the effects of a big lump sum being withdrawn all at once.

Because you're using DCA, there's very little emotion involved. That cuts back some of the risk and uncertainty you're likely to experience with other investments like stocks and bonds. And since it requires a fixed amount at regular intervals, you're also implementing some discipline into your financial life.

Pros of Systematic Investment Plans

• "Set it and forget it"
• Imposes discipline, avoids emotion.
• Works with small amounts.
• Reduces overall cost of investments.
• Risks less capital.