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What is Systematic Investment Plan (SIP)?

برنامه سرمایه‌گذاری سیستماتیک (SIP) چیست؟

Investing is one of the important methods of earning money and most people have gone to it at least once due to their life conditions. Contrary to its attractive appearance, this topic has a complex nature. What kind of investment plan should you have so that you can overcome the market fluctuations and ultimately get a lot of profit is a matter that makes this process difficult.

One of the methods that some investors use is the systematic investment program. In this method, investors regularly deposit specified and uniform amounts into a mutual fund or business account or retirement savings account. This type of investment has been famous for some time due to its ease and flexibility.

In fact, by depositing specific amounts periodically and with low investment risk, a person slowly creates a large portfolio of stocks for himself in the future. To see how the mentioned method is done and what features, disadvantages and advantages it has, we suggest not to miss this article and stay with us until the end.

What is Systematic Investment Plan (SIP)?

Systematic investment plans are investments in mutual funds in which people deposit fixed amounts at regular intervals (for example, monthly). The important point in this type of investment is that people don’t deposit a large amount of money at once into an account or a trading fund, and the principle is based on investment. Gradual Is.

While most SIPs are related to mutual funds, some SIP plans are also dedicated to investing in business accounts and retirement savings accounts. This program actually follows the dollar cost averaging (DCA) investment strategy. In this strategy, by making small investments at regular intervals and for a long period, fluctuations and turbulences in the market are ignored.

Features of SIP Systematic Investment Program

In systematic investing, the number of shares you buy each time is variable. With the increase in the price of the asset, the purchased share decreases, and on the other hand, with the decrease in the price of the asset, the purchased share increases. Thus, at the end of a period, you own a large amount of shares of that asset whose price is between the low and high prices in the periods of asset accumulation.

How does systematic investing work?

When you first enroll in a systematic investment program directly with the fund or through a broker, the fund or broker will specify the amount of money you intend to invest and the time interval of each deposit. When you make the first deposit into the investment account, you will receive a portion of the unit or point of the investment fund based on the ratio of the investment amount to the net asset value (NAV) of the fund. From now on, you invest regularly and based on what you decided at the beginning of the account creation.

Mutual funds offer users a variety of options. These types of investments are actually considered passive; Because once you deposit money into it, you continue your investment regardless of its performance. Therefore, you should always keep an eye on the amount of money you put in SIPs. When you reach a certain amount of capital or receive a certain point, you can decide to terminate your investment plan or change it.

If you combine this type of passive investment with an active strategy or investment, you can increase your capital; Of course, before doing this, it is better to consult with experts in this field to advise you on the most appropriate way.

Systematic investment and behavioral finance knowledge

Knowledge of behavioral finance

In general, emotion can overcome reason and make facts and circumstances appear in a different way. In the meantime, emotions make a person ignore the facts and take a different path by undermining the scientific evidence. Therefore, automating your savings and investment plans is a smart tool to protect your emotions, which are your biggest enemy when it comes to investing, against yourself. In fact, it is us who get caught up in emotional decisions and turn our assets into ashes by taking the wrong course and action.

The subject of people’s finances in the psychological field of behavioral financial knowledge shows that human actions and the feeling of greed and fear can affect a person’s performance more than choosing an investment model or asset allocation. Humans make the worst decisions whenever they don’t have strong and positive emotions. For example, when the price of a stock or digital currency is soaring and media headlines announce new price records and huge profits, people flock to these assets all at once.

The opposite also happens. For example, when stock prices are low for a long period of time, some people decide to sell their assets and stocks because of their emotions. This habit of “buying high and selling low” is completely at odds with the wise investment model. Having a systematic investment plan removes emotion from the investment process. With this method, you no longer need to constantly follow the news and market movements.

Systematic investment plan and dollar cost averaging

Systematic investment is one of the prominent and main dimensions of dollar cost averaging. Dollar cost averaging is one of the investment methods based on regular and periodic purchase of shares. Value and Strategic Advantage Dollar Cost Averaging (DCA) lowers the overall cost per share for our investments. Additionally, dollar cost averaging methods often come with an automated buying program initially. This specific process and plan makes it much less likely for people to make poor decisions based on emotions and market fluctuations.

Difference between Dividend Reinvestment Plan (DRIP) and SIP

sip and drip

In addition to SIP, many investors use the proceeds of their investments to buy the same securities through Dividend Reinvestment Plans. Dividend reinvestment means that shareholders can once again buy the shares of companies that they have previously bought and own.

In this model, instead of sending quarterly dividends to the investor, the fund or brokerage company uses his profits to buy more shares in the name of the investor. In fact, they buy more shares on behalf of the investor and with his money. Dividend reinvestment programs are also automatic; That is, when opening an account or buying the first share, the investor can give the right to use dividends to the related fund or brokerage. With this, the shareholder invests different funds in the long term.

Corporate DRIPs do not charge commissions to investors; Because there is no need for a broker to do the transaction. Some DRIPs offer the possibility of direct cash purchase of shares from the company with a 1-10% discount and no fees. At the same time, due to the special flexibility of DRIPs, investors can invest in them as much as they want and according to their financial ability.

Meanwhile, some confuse SIP and DRIP. While in DRIP, unlike SIP, the money is not deposited directly from the bank account to the investment account, as we said, the investment is financed from the dividend. Another difference between these two investment programs is that in DRIP, unlike systematic investment, fixed amounts are not invested; because dividends are not always fixed and fluctuate; Therefore, share repurchases will also be variable.

At the same time, to have a dividend reinvestment program, you must already have a profitable asset so that you can repurchase shares from its profit. SIP and DRIP can be good supplements for the investor. If you have a systematic investment plan and then add a dividend reinvestment plan to it, you will receive more stocks and assets over time and naturally reach your financial goals much sooner.

Advantages and disadvantages of systematic investment program

SIP, like anything else, has its pros and cons, which we list here.

Advantages of SIP

  • Protection against fluctuation
  • Easy investment on budget
  • Automatic investment
  • Little need for research and inquiry

Disadvantages of SIP

  • A lot of expenses
  • Low liquidity
  • Missing buying opportunities

Participation in the systematic investment program

Now that we understand the concept of SIP, let’s move on to how to participate in a systematic investment program. This partnership is formed in several stages, which are:

First step: identifying the goals

Investing should be a goal-oriented process. If you know your goals, you are much more likely to achieve them. Take a moment to think about your investment goals. Remember that each SIP is different from the other and some of them can better help you achieve your goals; Therefore, the first step should be to identify the target.

Second step: choosing the program

Systematic investment programs are different; So, you should take some time and compare the options before you to see which one suits your goals and investment style better. Be sure to pay attention to these points when comparing SIPs:

  • Fees: Some investment programs charge huge fees and others have more reasonable fees. Undoubtedly, no one wants to participate in a program that has a lot of fees; Because in the end, one’s financial profit is reduced and the growth capacity is limited.
  • Profit history: Look at the investment plan’s profitability history over the past three to five years, and if needed, check for more years.
  • Asset Allocation: When investing, you must know what area you are going to allocate your capital to. See what assets are available and see if they match your investment goals.

Third step: setting and filling the forms

Each systematic investment program provider has specific forms for opening SIP. However, all these providers are required to submit a KYC (Know Your Customer) form to the investor. In this form, all your personal identity information is entered so that the fund or brokerage can make sure that your investment is not part of a criminal activity such as money laundering processes.

Fourth step: Bank account connection

SIP investment is done automatically through bank transfer; So, to get started, you need to connect your bank account. If you are buying through a SIP broker, you must have already linked your bank account to the broker account. If you are buying directly from mutual fund SIP, they will ask you for your account number and tracking number.

Systematic investment program alternatives

If you have researched and inquired about SIP and have come to the conclusion that it does not meet your requirements and requirements, don’t worry; Because there are other ways to access the market and use the benefits of automatic investing. Next, we describe two examples of these common investments:

  • Buying exchange-traded funds (ETF): Exchange Traded Funds or ETFs are investments that take money from large groups of people and invest it in diversified portfolios of stocks. These funds can be bought through brokers like any other type of shares.
Exchange Traded Funds (ETF)

Many brokers provide the possibility of automatic investment and withdraw predetermined amounts from your bank accounts at specified time intervals and invest in the assets of your choice. Making automatic investments in mainstream market ETFs allows you to build your own SIP without having to pay custodial fees and mutual funds.

  • Using robot advisor services: Advisor robots are very popular among new generation investors. Advisor bots like Betterment and Acorns make automatic investments on your behalf. In general, these services invest in a wide range of ETFs and without the need of the investor’s effort and spending his time, his property enters the capital markets.
Investment advisor bot instead of SIP

When you create a robo-advisor account, you will be asked about your investment goals and the amount of your capital. Using your answers, the consultant creates a plan to achieve your financial goals. This program often includes regular and fixed purchases. The main advantage of robot advisors compared to traditional SIPs is their cost. The advisor robot receives only 0.25% commission.

Conclusion

Systematic investment programs have their own appeal. Anyone can allocate some money and invest in this field, regardless of their experience in the financial markets. Through their dollar cost averaging and great diversity, these programs protect investors against the risks of market volatility.

If you ever decide to invest in SIP, do your research beforehand. There are many options in terms of price and performance and you should compare them well. Of course, with more research and inquiry, you can find the right option that meets your needs and achieves your goals. Remember that you are responsible for the profit and loss; So be careful with your capital.

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