Mutual funds are often described as a basket of stocks or bonds, depending on the fund's investment objectives, managed by a professional with shares of the portfolio made available for purchase by investors. At the end of each trading day, all the fund's holdings are priced and the fund's net asset value is calculated. Purchases of mutual funds can be made with lump-sum investments or through a systematic investment plan (SIP).

An SIP involves an investor contributing a set dollar amount on a regularly scheduled basis. For example, you might set up a SIP to buy $100 per month worth of ABCDX mutual fund. Each month, on the specified date, you would have that buy order executed. This way of investing offers two key advantages: easy saving and dollar-cost averaging.

Setting up an SIP make it easier to budget for retirement and other investment goals. When you work a small amount into a monthly budget, it becomes more likely that you stick with the plan, making it easier to achieve your investment goals. For example, it is relatively easy to commit to investing $100 per month for retirement savings, but coming up with $1,200 at one time may be more difficult.

Through buying shares of a mutual fund on a regular basis, you can reduce the average cost per share. Market fluctuations over time are likely to present opportunities where shares are purchased at a lower price. This technique, called dollar-cost averaging, is a widely used strategy by many investors and is recommended by financial advisors.

Advisor Insight

Dan Stewart, CFA®
Revere Asset Management, Dallas, TX

A systematic investment plan, or SIP, simply means making periodic and scheduled contributions to your investment account or a specific security. Dollar-cost averaging is a SIP in its simplest form.

For example, investing $500 per month total in two different mutual funds of $250 each would be a SIP. But a SIP is not an investment strategy like a mutual fund. A mutual fund is a professionally managed fund in which the manager invests according to the fund's prospectus.

While the SIP is a great way to invest when growing your assets, once you accumulate a decent amount of wealth and are, say, nearing retirement, you may want to consider some type of defensive strategy that involves more active management.