SIP for Retirement
A systematic investment plan (SIP) is a plan where investors make regular, equal payments into a mutual fund, trading account or retirement account, such as a 401(k). The aim is to benefit from the long-term advantages of dollar-cost averaging (DCA), and the discipline and the convenience of saving regularly without taking any action except the initial setup of the SIP. In DCA, an investor buys an investment using periodic equal transfers of funds to build wealth or a portfolio over time slowly.
How a SIP Works
Most brokerages and mutual fund companies, offer SIP, allowing investors to contribute quite small amounts. A money market account or other liquid account is typically used for funding the payments to or buying shares for the systematic investment plan. Although the payments can be made by hand, most SIPs are set up to be funded automatically each month, quarter or whatever period the investor chooses.
Systematic investing works on the principle of regular and periodic purchasing of shares or units of securities. Dollar-cost averaging involves buying the same fixed-dollar amount of a security regardless of its price at each periodic interval. 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.