When managing your personal finances, it is important to regularly budget a certain amount in order to build up a reserve for the future—this regular budgeting is the basic foundation of good future or retirement planning. But simply depositing money regularly in a savings account does not provide the sort of returns that will make your investment grow satisfactorily; instead, using a Systematic Investment Plan or SIP, you can take advantage of higher market returns with the same disciplined, regular savings pattern. SIP investment allows your regular deposits to be invested into a mutual fund or exchange traded-fund, a diversified portfolio of securities that will provide safe market returns, and also take advantage of dollar cost averaging to reduce the average price of regular investment.
The convenience of SIP investment makes it a great way to save money for the future or invest for retirement. By adding regular savings to your budget, you can discipline your savings or investment strategy and chart exactly how long it will take to save a certain amount, which you can compound with the average returns of the fund in which you are investing. That way, you can have a better idea of exactly how much you will have saved at a certain point in the future. These plans allow you to take control of your retirement planning and achieve better returns each year without having to be personally active in the market. Watching your investment grow regularly in principal and returns is rewarding, and discipline is a key to good personal finance.
Systematic investment also takes advantage of dollar cost averaging, which is an investment technique based on the regular investment of the same amount of money. When the price of the investment is relatively lower than usual, you are able to purchase more shares, and when it is higher, you purchase fewer shares. This works to reduce the average price of each share over time, allowing you to get more for less money. For example, say you invest one hundred dollars every month. The price of the security or exchange-traded fund happens to be low at the time—ten dollars. You get ten shares at that price. Another month, you invest the same amount of money, but the price is now twenty dollars, so you can only get five shares. The average price of your investment is not the average of the two prices, which would be fifteen dollars; instead, it is thirteen and one-third, because you got fifteen shares for two-hundred dollars.
Because of the active involvement of dollar cost averaging, systematic investment plans often work best when the market is trending lower and provide average returns when the market trades in the same range for a long time—this means it is a great investment plan in a volatile and uncertain market. While it is not as effective as other plans in a strong market, it is relatively safe, which is important in long-term planning. SIP investment is also a great way to get involved in the market for beginning investors, or individuals who want to receive better returns on their savings without much involvement.