Automatic Investment Plan

One method investor can use to make it easier for themselves at this generally complicated point is to have an automatic investment plan, or AIP. With such a plan, regular amounts of money (commonly every month) are deducted from their bank accounts and invested in certain types of funds, like mutual funds or index-linked shares. 

What is an Automatic Investment Plan (AIP)?

AIPs are designed with the aim of providing a framework that enables individuals to invest regularly over a longer period, no matter what state the market is in. This approach involves several key features for beginners who may not have large sums of money at their disposal, such as:   

• Dollar-Cost Averaging: This method involves investing a fixed amount of money at regular intervals, which means that the investor buys more shares when prices are low and fewer shares when they are high. By doing so, the average cost per share over time can be lowered, and the effect of market volatility can be mitigated.
• Convenience and Automation: Once the system has been set up, it runs automatically and requires very little ongoing involvement on the part of the investor. This reduces the chances of emotional decision-making and helps maintain a consistent investment strategy.
• Customisable Plans: AIPs can be personalised to suit an individual’s financial goals, time frames, and risk tolerances. Investors have options regarding the frequency and size of investments and the specific investment vehicles used. 

Understanding the Automatic Investment Plan (AIP)

An automatic investing plan is one of the most effective strategies to save money. Several market methods have been developed to allow automatic investment plans.
Investors can make contributions through their workplace by setting their paychecks to invest in employer-sponsored investment accounts. Additionally, individuals might choose to set up automatic withdrawals from their personal accounts.

Employer-sponsored automatic investment plans

For the sake of supporting employees’ short-term and long-term investment objectives, companies should give them opportunities for automated investing within their benefit plans. 401k is the most common type of employer-sponsored automatic investment plan where workers can deduct a certain percentage from every paycheck. 

Moreover, to foster allegiance and longevity, organisations may provide automated investment in company shares or types of mutual funds (e.g., Z-Shares). Some employers even collaborate with financial institutions to give employees an opportunity to invest automatically in personalised brokerage accounts and partnerships that facilitate holistic financial planning and address short-term investment needs.

Automatic Investment Plans for Individuals

In addition to employer-sponsored schemes, individuals can choose from a variety of automatic investment plans (AIPs). Automation is possible in most investment accounts, with retirement and brokerage options leading the pack. The former usually comes with incentives for setting up recurring contributions, while many trading platforms permit parking automated investments in money market funds until they are dispersed into other securities. 

A popular example of AIPs is the Dividend Reinvestment Programme (DRIP), in which investors use their cash dividends to buy more shares or even fractions of a share of the stock that is paid to them. 

Benefits of an Automatic Investment Plan

Discipline and Consistency: It helps maintain a disciplined approach to investing that is necessary for long-term wealth creation. 

Reduced Impact of Market Timing: Regular investments are made despite market conditions, thus reducing the risks associated with trying to time the market. 

Compounding Growth: Time allows for compounding growth, which results in more earnings over time as earnings are ploughed back into the investment. 

Lower Minimum Investments: AIPs have lower minimum requirements for mutual funds and ETFs, making them accessible to more people, even those with little money to invest. 

Ease of Budgeting: Regular fixed contributions are easier to plan for in a budget than lump-sum investments. 

Working of Automatic Investment Plans

To begin investing through AIP, an investor must fill out an application form with information such as the mutual fund scheme, quantity of investment, regular interval period, and a specific date on which the cash will be removed based on his or her investment goals. The investment amount can be deducted automatically from either a paycheck or a personal bank account. 

On the designated day, the investor purchases the matching units of specific funds at the market rate. 

The number of units given fluctuates depending on the scheme’s net asset value (NAV), a performance indicator for a strategy. NAV is determined by subtracting the total value of liabilities from the total value of assets and then dividing the amount by the total number of outstanding units. 

Examples of Automatic Investment Plans

• Vanguard 

Vanguard, one of the largest investment management companies worldwide, offers an AIP through which investors can regularly contribute to their ETFs or mutual funds. For example, an individual might decide to invest $200 every month in the Vanguard Total Stock Market Index Fund (VTSAX). This systematic way of investing helps grow a large portfolio without constant supervision. 

• DBS Invest-Saver 

In Singapore, DBS Bank has a plan called the Invest-Saver that permits investors to put money into ETFs and unit trusts routinely. For instance, an investor can initiate an AIP so as to invest SG$300 per month in the Nikko AM Singapore STI ETF, which follows the Straits Times Index’s STI) performance. This is an inexpensive and convenient approach to taking part in the shares of companies listed on SGX. 

Frequently Asked Questions