how systematic investment plans sips work
mutual funds and other investment companies offer investors a variety of investment options including systematic investment plans sips give investors a chance to invest small sums of money over a longer period of time rather than having to make large lump sums all at once most sips require payments into the plans on a consistent basis whether that s weekly monthly or quarterly the principle of systematic investing is simple it works on regular and periodic purchases of shares or units of securities of a fund or other investment dollar cost averaging involves buying the same fixed dollar amount of a security regardless of its price at each periodic interval sips allow investors to use smaller amounts of money with the benefits of dollar cost averaging as a result shares are bought at various prices and in varying amounts though some plans may let you designate a fixed number of shares to buy because the amount invested is generally fixed and doesn t depend on unit or share prices an investor ends up buying fewer shares when unit prices rise and more shares when prices drop sips tend to be passive investments because once you put money in you continue to invest in them regardless of how they perform that s why it s important to keep an eye on how much wealth you accumulate in your sip once you ve hit a certain amount or get to a point near your retirement you may want to reconsider your investment plans moving to a strategy or investment that s actively managed may allow you to grow your money even more but it s always a good idea to speak to a financial advisor or expert to determine the best situation for you special considerationsdca advocates argue that with this approach the average cost per share of the security decreases over time of course the strategy can backfire if you have a stock whose price rises steadily and dramatically that means investing over time costs you more than if you bought all at once at the outset overall dca usually reduces the cost of an investment the risk of investing a large amount of money into security also lessens because most dca strategies are established on an automatic purchasing schedule systematic investment plans remove the investor s potential for making poor decisions based on emotional reactions to market fluctuations for example when stock prices soar and news sources report new market records being set investors typically buy more risky assets in contrast when stock prices drop dramatically for an extended period many investors rush to unload their shares buying high and selling low is in direct contrast with dollar cost averaging and other sound investment practices especially for long term investors sips and dripsin addition to sips many investors use the earnings their holdings generate to purchase more of the same security via a dividend reinvestment plan drip reinvesting dividends means stockholders may purchase shares or fractions of shares in publicly traded companies they already own rather than sending the investor a quarterly check for dividends the company transfer agent or brokerage firm uses the money to purchase additional stock in the investor s name dividend reinvestment plans are also automatic the investor designates the treatment of dividends when they establish an account or first buy the stock and they let shareholders invest variable amounts in a company over a long term period company operated drips are commission free that s because no broker is needed to facilitate the trade some drips offer optional cash purchases of additional shares directly from the company at a discount with no fees because drips are flexible investors may invest small or large amounts of money depending on their financial situation advantages and disadvantages of sipssips 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 although they can help an investor maintain a steady savings program formal systematic investment plans have several stipulations for example they often require a long term commitment this can be anywhere from 10 to 25 years while investors are allowed to quit the plan before the end date they may incur hefty sales charges sometimes as much as 50 of the initial investment if within the first year missing a payment can lead to plan termination 1systematic investment plans can also be costly to establish a creation and sales charge can run up to half of the first 12 months investments also investors should look out for mutual fund fees and custodial and service fees if applicable 1 set it and forget it imposes discipline avoids emotionworks with small amountsreduces overall cost of investmentsrisks less capitalrequires long term commitmentcan carry hefty sales chargescan have early withdrawal penalties