A Systematic Investment Plan (SIP) is a plan in which investors make regular and equivalent payments to a mutual fund, trading account, or retirement account. The Systematic Investment Plan allows investors to save regularly for smaller amounts of money while benefiting from the long-term benefits of Dollar Cost Averaging (DCA). Using the DCA strategy, investors buy investments using the same transfer of funds on a regular basis to build wealth or portfolios over time slowly.
Mutual funds and other investment companies offer investors a wide range of investment options including systematic investment plans. The Systematic Investment Plan gives investors the opportunity to invest small amounts of money over a longer period of time instead of having to make large sums of money all at once. Most Systematic Investment Plans require payments into the package on a consistent basis—whether it’s weekly, monthly, or quarterly.
The principle of systematic investing is simple. It works on the regular and periodic purchase of shares or units of securities from funds or other investments. Dollar cost averaging involves purchasing the same fixed dollar amount of a security regardless of its price at any periodic interval. As a result, shares are purchased at various prices and in varying amounts—although some plans allow you to set a fixed number of shares to buy. Because the amount invested is generally fixed and does not depend on the unit or share price, investors end up buying fewer shares when the unit price goes up and more shares when the price goes down.
Systematic Investment Plans tend to be passive investments because once you put money in, you continue to invest in it regardless of how it performs. That’s why it’s important to keep an eye on how much wealth you accumulate in your Systematic Investment Plan. Once you reach a certain amount or near your retirement age, you may want to reconsider your investment plan. Moving to an actively managed strategy or investment can allow you to grow your bankroll even more. But it’s always a good idea to talk to a financial advisor or expert to determine the best situation for you.
This term is usually popularized by foreign and domestic securities companies to create cash inflows by inviting investors to buy mutual fund units on a regular basis every month. More and more investors who buy mutual funds from a securities company will increase cash inflows and a small portion will be allocated as management fees, namely various costs incurred by the Investment Manager for daily operational activities such as bloomberg terminal subscriptions, employee salaries, analyst salaries and MI salaries. itself. The greater the cash inflow, the greater the management fee received which has an impact on increasing the salaries of employees, analysts and MI.
How to implement a systematic investment plan?
* Dollar Cost Averaging is an investment strategy by setting aside some funds to be invested by buying financial instruments on a regular basis. For example, you have an income of IDR 5,000,000 every month and are committed to setting aside IDR 1,000,000 every month to buy X units of mutual funds or buy Y lots of shares. The advantage of the DCA strategy is that it can minimize losses when the market is weak. But the drawback is the relatively low profit value when the market forms a strengthening trend.
* Lump Sum is an investment strategy that sets aside some funds to be collected first and then invested by buying financial instruments after the nominal is deemed large enough. The advantage of implementing a lump sum strategy is optimizing the amount of profit when the market is strong, but the disadvantage is that the loss is relatively large when the market forms a weakening trend.
Do professional traders implement a systematic investment plan?
Trading and investing activities carried out by professionals are more likely to depend on market fundamental conditions because in general they already have an allocation of funds that can be invested. For example, trader X works at investment company ABC and gets Rp 10 billion in managed funds, what trader X considers is not a systematic investment plan but the fundamental condition of each stock or other financial instrument. If there is an attractive opportunity, buying can be done using several methods, such as buying periodically for several days or buying all at once in one day. Systematic investment plans are more appropriate for passive traders and investors who make trading or investing activities as a side activity so they can focus on working and earning income so that a small portion can be set aside to invest.
Types of Systematic Investment Plans
What I mention below are some examples of the many types of SIPs provided by investment companies or investment managers.
– Flexible Systematic Investment Plans (Flexi SIP): This SIP allows us to change our deposits according to market conditions and our personal finances. For example, when you are laid off, you can make a smaller deposit to this type of SIP.
– Step up Systematic Investment Plans (Top Up SIP): investors can increase the amount of investment in this SIP at fixed time intervals. For example, employees who experience a salary increase every year can increase their deposits every year.
– Perpetual Systematic Investment Plans: investors can determine the start and end date of the SIP. So we can estimate with certainty how much total profit we will get. However, when investors forget or do not decide on the expiration date of the SIP, this type of SIP will be automatically terminated in 2099.
– Trigger Systematic Investment Plans: these are SIPs with special arrangements according to the wishes of investors. For example, if the SIP value reaches a certain amount, then a small portion of the funds will be withdrawn to the account or allocated to other assets.
When is the best time to start Systematic Investment Plans?
The best time is anytime when we are ready. Ready here means having a stable income and ready to take risks. Although SIP is relatively safe, at least we need to estimate the financial possibilities that we can face in the future that will interfere with the investment process in SIP. In addition, we also need to determine the SIP scheme that best suits our circumstances, whether the type is Flexi SIP or Trigger SIP.
Advantages and disadvantages of Systematic Investment Plans
Advantages
– Help improve discipline in investing. The problem is that we have to deposit funds regularly, either monthly or quarterly.
– The process of investing in SIP is easy. Because it can be set to auto debit to the account. So the funds will be deducted automatically when the deposit time arrives.
– SIP’s rate of return is more attractive than deposits.
– SIP can be accessed by the middle class or workers with mediocre income because the value of the deposit is relatively small.
– There is a compounding advantage obtained from SIP. So even though our deposit is small, in the long term the rate of return will be quite large thanks to compounding.
– Help realize financial goals, whether in the form of a pension fund, and children’s education, or other goals.
Deficiency
– SIP is not suitable for people who have uncertain income.
– The SIP rate of return is relatively lower than the general market rate of return.
– SIP deposits cannot stop halfway and then continue again.
