Investing in Mutual Funds through Systematic Investment Plans

Step one in investing in a mutual fund is to do your homework and pick a fund that is likely to give you long-term gains. The type of investing won’t make much difference if the fund heads south. Check the fund history to see how it has done over the years. Don’t rely on this completely, however, because funds are affected differently by current economic trends.

Right now, I would stay away from stock market index funds. I think the stock market is likely to tank, whether catastrophically or over time. Look to funds that contain market sectors that are likely to do well in a weak and weakening economy.

If you feel comfortable doing so, look at funds of foreign stocks or even foreign currency funds. If you want to stay in the good ol’ U.S., look at the trends. If I were to buy a fund today I would look at precious metals, base metals, commodities (especially food and building materials), and energy funds (oil, gas, alternative energy, etc.).

If you don’t pick a good fund your style of investing won’t make much difference. Once you have a solid fund that looks to gain in the short and long term, then you can look at the benefits of a Systematic Investment Plan (SIP).

Many mutual funds require a certain minimum investment. This is usually in the neighborhood of $1,000 or more. Unless you have a lot of investment capital, you won’t be able to invest in more than a few different funds or possibly just one. The advantage of SIPs is that you are not dealing with a minimum investment to buy into the fund.

Systematic investment plans allow you to purchase shares in a fund with a monthly dollar amount. There may be a minimum monthly investment amount but it will be a fraction of the minimum lump sum investment you would otherwise pay. In most cases you can stop your payment plan at any time, but make sure you check your SIP agreement. Also, most plans prefer or require automatic payments.

What is the advantage of a SIP? Aside from not having to plop down a large initial sum of cash to get into a fund, the SIP helps to minimize risk and average out your cost. Funds gain and lose money every day just like any individual stock. As with a stock, if you happen to buy a fund when it is at a high, you could end up losing money in the short term or even long term.

With a SIP, if the fund goes down in price the month after you buy your first shares, you will simply be buying the next month’s shares at a lower price (and therefore get more shares with the same payment). Over time, you will not be paying the highest or the lowest price for your fund shares but an average of the price over the life of your investment.

A small monthly investment can grow into a nice piece of your retirement nest egg. This is essentially what you are doing when you participate in a company 401k or 403b plan. Money is taken out of each check (and hopefully matched by your employer) and put into one or more funds.

Pick a good fund. Pick a good plan, and start growing your nest egg now.