What is a Systematic Investment Plan?

Photo by Matt Ragland / Unsplash

Investing is usually considered expensive, complicated, and unattainable for almost everyone but the rich and capable.

And while that might have been true before, things have certainly changed over time. Investing, especially in the stock market, has never been easier.

There are plenty of investment apps providing access to numerous investments, and the cost of participation keeps falling. Today, you don’t need to be either rich or connected to get started.

But you do need to be strategic and methodical. The objective is to grow your assets and hit your goals while avoiding any of the pitfalls that may swallow your money. So if you’re going to start, it’s essential to approach things with a plan.

A Systematic Investment Plan (SIP) helps you to achieve exactly that.

What is a Systematic Investment Plan?

Also called SIP, it’s an investment strategy wherein the investor invests a fixed amount of money in a specific asset at regular time intervals. This could be monthly, quarterly, or whatever frequency that’s convenient.

In this way, SIPs reduce the pressure of investing by breaking it into chunks. Instead of waiting to invest a lump sum at once, you can ease into it slowly over time.

As long as you keep up with the plan, investing the set amount at the set intervals consistently, the size of your investment holdings will automatically keep increasing.

SIPs were originally used by money market funds to help small investors slowly invest in MMFs and increase the size of their shares continually over time. The same concept can, however, be applied to any investment asset.

Let’s examine how SIPs work in more detail.

How does an SIP work?

Piecing together a workable and functional SIP entails three things:

  • Setting aside a fixed amount of money
  • Doing it at periodic intervals e.g. weekly, monthly, quarterly
  • Investing it in a specified investment asset

Consider this example:

Lisa decides to start an SIP by contributing 1500 each month towards buying shares. She instructs her bank to automatically deduct this amount from her account and send it to her broker.

From there, the specific shares she wants are bought and deposited directly into her account. This keeps going on, month after month, until she has accumulated the desired amount or is satisfied with what she’s accumulated.

Based on this example, you can see that Lisa’s SIP has all three necessary ingredients.

  1. There’s the fixed amount of money (KES 1500), which isn’t substantial by the usual investing standards. But this isn’t a problem because she plans to invest for as long as possible so the amount will accumulate over time.
  2. She also settled on a monthly plan as her ideal time interval. This was informed by what’s sustainable for her over the long term. Someone else might have decided to do it on a weekly or even quarterly basis. Whatever the case, it needs to be an interval that’s sustainable over the long term.
  3. Finally, she chose shares as her preferred investment choice. Again, this may vary from person to person. Someone else might decide to invest in money market funds, bond funds, or other asset types.

With all three ingredients, you can plan and invest in any investment asset that’s reasonably priced. The only big factor to consider is sustainability. You’ll need to adjust each of the ingredients in such a way that allows you to remain consistent.

That way, you can keep investing for longer and accumulate more of your preferred assets.

Why is an SIP good for you?

  • It reduces the overall cost of investing – since you spread out the buying process over time, you’ll afford more when the price is low and less when the price is high. Overall, this cancels out to a lower standard price.
  • It fosters disciplined investing – consistency is maintained because the periodic amounts are low and sustainable. This cultivates an investing mentality, which spills over into other financial habits.
  • It reduces the pressure of investing – popular belief dictates that you need large sums of cash to get started investing. An SIP goes around that notion. Provided that you’re clear on your preferred asset, you can put an SIP in motion and begin accumulating more of it.
  • It reduces the amount of risk that you’re exposed to – Easing into an investment slowly gives you the chance to keep evaluating its performance. If you invested a lump sum and it performed poorly, you’d lose a lot. But by doing it in chunks, not much of your capital will be at risk if anything goes wrong with the investment.

What are the downsides?

  • While investing in small chunks confers the benefits of partial safety, it also requires a long-term commitment. The SIP is only efficient if it goes on for long enough to accumulate a sizable investment. And since you only invest a small amount each time, it might take a while before you have enough.
  • Also, the prices tend to fluctuate over the short term, making it difficult to predict how much your amount will buy per session. Worse still, there will be seasons when prices will seem to keep rising, translating to a reduction in the quantity you can buy.

How can you start your SIP?

In summary:

An SIP is a financial strategy that aids in the buying of a specific investment asset over time by breaking down the buying process into chunks and following a schedule to keep accumulating it over time.

So you need to have an asset identified, a schedule you can work with, and an amount you can afford to keep setting aside for the long haul. It therefore follows that you have to start by defining what you want to achieve.

Why is that important? Because your goal will dictate the kind of assets that are best suited to you, which will in turn inform how much you need, which will then help you determine your intervals.

Starting with your goal is essential because it’ll provide clarity.

Over to you

Before starting your own SIP, consider what you want to achieve. Are you looking for long-term financial growth? Do you want to grow passive income sources? Are you saving for near-term goals?

Only a clear goal will help you formulate a workable SIP and stick to it long enough to make meaningful progress. So start by asking yourself: what’s my overarching financial goal?

Not only will this guide all other investment decisions you make, it’ll also ground you in the purpose of your investment journey.